How Much Money Will Wally Save by Choosing a 15-Year Mortgage Over a 30-Year Mortgage?

Calculating Interest Savings

Wally Bee purchased a new home for $250,000 with a $40,000 down payment and financed the rest with a 30-year 4% mortgage. If he had chosen a 15-year 4% mortgage instead, he would save a substantial amount in interest expenses over the loan term.

To calculate the total interest expense for each mortgage option, we need to determine the loan amount for both scenarios. For the 30-year mortgage, Wally borrows $250,000 - $40,000 = $210,000. Similarly, for the 15-year mortgage, he would also borrow $210,000.

For the 30-year mortgage, the interest rate is 4%, and the loan term is 30 years. Using the formula for calculating monthly mortgage payments, the monthly payment would be approximately $998.85. Over the 30-year term, the total interest expense would amount to $159,586. This means Wally would pay a total of $369,586 (including the down payment) over the life of the loan.

On the other hand, for the 15-year mortgage, even though the monthly payment would be higher at approximately $1,530.06, the total interest expense over the 15-year term would be significantly lower at $58,811. This results in a total payment of $308,811 (including the down payment) over the life of the loan.

Comparing the two scenarios, Wally would save $100,775 in interest expenses by choosing the 15-year mortgage instead of the 30-year option. Despite the higher monthly payments, the shorter loan term allows Wally to pay off the loan faster and save a considerable amount in interest over the long run.