The Cost of Long Amortizations

It can take many years after you close on a new mortgage before you’re paying more principal than interest. 

Once you get to that point, it can feel kind of empowering.  We sometimes humour ourselves and refer to that date as the “balance of power.” 

Here’s a table that shows how long it takes to reach this point for the five standard amortizations.  (Assuming a $100,000 mortgage at 4.25% with monthly payments.)

Amortization Payment Years Until Principal > Interest
15 years $750 0 (You pay more principal on day 1)
20 years $617 3.7
25 years $540 8.7
30 years $490 13.7
35 years $456 18.7

As this table shows, tacking on 10 years to your amortization means it takes 10 additional years to reach the balance of power (i.e., make payments that are more principal than interest).  Column #3 is roughly accurate regardless of the mortgage amount.

So the moral is this.  If you’re considering a 35-year amortization for your next home mortgage, be confident you can accelerate pre-payment at some point in the near future.  Otherwise, you’ll be an interest slave much longer than you want to be.

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Sidebar: 

  • Here’s a handy amortization calculator if you’d like to run your own scenarios.
  • The above guidance does not necessarily apply to mortgages on income properties.  On these types of properties, there may be valid business or tax reasons for leaving your payments low and keeping a long-term amortization. Speak with a mortgage planner for details.
  • Pre-payments and accelerated mortgage payments can make a world of difference.   For example, one could knock over five years off a 35-year mortgage by:
    • Making accelerated bi-weekly payments; or,
    • Making an annual lump-sum pre-payment of 1/2% of the original mortgage amount (i.e.  $500 a year on a $100,000 mortgage).
  1. You can make accelerated (bi-)weekly payments or increase your monthly/semi-monthly payments by 1/12.
    They are mathematical equivalents

  2. I have always liked the blackjack amortization: 21 years
    With a 21 year amort. the payments are still reasonable but majority of the money goes to principle after the first 5 year term.

  3. Even on a mortgage forum do people not understand the time value of money?
    Nothing wrong with paying a mortgage off as fast as you are comfortably able to, but keep in mind – even if inflation is 2% per year, $1.00 today is only worth $0.50 in 35 years. i.e. paying now costs you more than paying later.

  4. Is there a good mortgage calculator that can show me my mortgage schedule based on paying my 35 year mortgage bi-weekly?
    Note: I’m also doubling my payments so that instead of $500 I pay $1000 every 2 weeks with the additional $500 being all principal.

  5. Time value of money is great but most people care about two things: having less debt and piece of mind.
    However, if you are going to apply TVM you have to apply it consistently. 2% inflation means returns get discounted (ie. money gets cheaper) regardless of what you do with it.
    You then have to ask yourself a question. What is the alternative to a mortgage prepayment? Investing in stocks? Long-term investors haven’t made money in stocks in 10 years!
    http://www.businessweek.com/the_thread/economicsunbound/archives/2008/09/10_years_of_non.html
    If you’re in an upper bracket where are you going to get a risk-free after-tax return of 6-7% or more? Probably nowhere!
    Many people even take the mortgage principal they prepay, readvance it, and invest it (generally using tax deductible interest) to increase returns further.
    Finally, don’t forget that early repayment means you can redirect mortgage payments into another investment once the mortgage amortizes.
    All these things must be considered.
    For these reasons the time value of money is far from a deal breaker when it comes to mortgage prepayments.

  6. posterboy: there is certainly value in walking on a FULLY paid for lawn! :) (emotional element, as has been said, peace of mind)
    Also, don’t forget that a true look at the time value of money would see many thousands (100’s even) of money that could have been invested TODAY, instead of being free YEARS from today. That is, if I could AVOID the interest paid and instead invest it, I’d rather do it now as opposed to 10 years from now.
    Realistically, say I can pay off my mortgage 10 years early, that is 10 years of money I have to invest that I wouldn’t have had if I stuck to the original schedule. In this case, I now have my interest AND prinipal amount available to invest (all things held equal).

  7. John, I am with you on the increase monthly by 1/12. I find this way easier than trying to come up with 3 payments in a month two times every year. It also allows you more control if you ever are in a bind and need the cash.

  8. John,
    Thanks for posting that suggestion. It seems to be something often overlooked by many as we often hear advisors recommend accelerated bi-weekly payments as being the fastest way to pay off a mortgage. What they fail to mention is that it is only true if you base it on making minimum payments in each situation as opposed to showing that if the total amount paid over the course of a year is the same, you will end up relatively even whether you choose weekly, bi-weekly, accelerated bi-weekly or monthly.

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