This calculator can be used to make a side-by-side comparison of three different mortgages of various lengths and interest rates. The calculator needs a total of four inputs, including:
- The total home loan amount, also known as the mortgage’s principal
- The rate of interest being charged for a loan of 15 years, 20 years and 30 years
The calculator then provides the user with three sets of outputs:
- The monthly mortgage payment for each of the three loans
- The total interest charges for each of the three loans
- The total of all payments for each of the three loans, which is found by multiplying the monthly payment times the term of each loan (in years) times twelve
Evaluating mortgage alternatives – monthly payments
Since the amount of money borrowed is fixed, loans of shorter duration will require higher monthly payments to repay the loan. This is why many first-time homeowners choose mortgage terms of 30 years. The lower monthly payment supplies two benefits:
- More of the monthly household income can be used to pay for other expenses rather than repayment of the mortgage
- Assuming the home buyer would qualify for the larger monthly payment under a 15-year term scenario, they could elect to make the same monthly payment under a 30-year mortgage and take out a larger loan
Evaluating mortgage alternatives – total interest paid
Under most scenarios, the total interest paid under the 15-year mortgage scenario would result in considerably lower interest charges when compared to mortgage of 20 or 30 years. Intuitively, this should make sense too. A loan with a term of 30 years means the lender is providing the borrower with a financial benefit for a much longer timeframe when compared to a 15-year loan, which means the finance charges will be higher too. In addition, since the risk of non-payment is lower with loans of shorter durations, the annual rate of interest on the 15-year loan will almost always be lower than that of a 30-year mortgage.
Evaluating mortgage alternatives – total of all payments
Mathematically, the total of all payments can be found by adding the total home loan amount to the total interest paid. It can also be found by multiplying the monthly payment times the number of years the mortgage is being repaid times twelve (months in one year). While this series of values will be the largest of the three sets in the comparison, when you strip away the money borrowed, you can see the variation within the total of all payment series is driven by the interest being paid on each loan type.
When shopping for a mortgage, the borrower is really faced with a decision that is highlighted by this calculator. Loans of shorter duration result in higher monthly payments, but the loan is paid off quicker, resulting in lower finance charges. Alternatively, a borrower could lower their monthly payment; however, the total finance charges will be higher since it takes longer to repay the lender.