30 Years in 30 Days • Year 8: The Mechanics of Mortgage Interest—What Really Matters

It’s all about the interest rate and the number of payment periods. Mortgage interest growth rates are important to understand. Plus 4 key takeaways.

Related and recent articles

(Full list of “30 Years in 30 Days” Series articles available at bottom of this article.) • 30 Years in 30 Days • Year 10: A Tale of Two Eras — Home Buying in 1972 and 2023 • 30 Years in 30 Days • Year 9: Visualizing Savings — Mortgage Charts that Matter • 30 Years in 30 Days • Year 6: Mortgage Power Play with a Single $100 Extra Payment • 30 Years in 30 Days • Year 3: Early Extra Payments Are Magical • 30 Years in 30 Days • Year 2: Rapid Progress on the 30-Year Mortgage • 30 Years in 30 Days • Year 1: Starting Strong on the Mortgage Journey • Kickstarting “30 Years in 30 Days” — Decades of Mortgage Wisdom in 1 Month • A Friend Texted to Ask “Who I Favored” for 2024 butHated My Answer • Has U.S. Healthcare Really Become a Mob Protection Racket?

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So who does the “white magic” of paying extra each month on your mortgage in the early years helps?

This one is easy.

It helps the homebuyer. Big time.

You can end up paying dramatically less interest over the life of your mortgage — literally hundreds of thousands of dollars LESS interest even with just what is today an average-sized mortgage of around $400,000.

And unless you are personally against the idea of finishing up your 30-year mortgage years early and with hundreds of thousands of dollars more in your bank account, I’m going to keep calling this “white magic.”

But how does this work?

Today I’m talking about the “how” of the process.

What are the 3 key drivers of mortgage interest?

1. The principal amount — how much you borrowed.
2. The interest rate
3. The number of periods (i.e., the number of months or years) that the mortgage is supposed to last.

That’s it.

The interest rate

Think of this as the exponential growth rate . . . because that’s exactly what it is.

Note: I have written 2 articles on how exponential growth works that I also recommend to you. It’s incredibly important that people better understand what “exponential” really means, because these growth curves are out there in the real world in plenty of places where they can and do have a massive impact on us individually and also at the human race level.

Exponential growth curves happen in plenty of other places besides mortgage interest, including semiconductor performance growth over the years and decades (“Moore’s Law”); virus spread; carbon levels in the atmosphere; climate change; and population growth, to name just a few.

If you have (1) a high interest rate — say, 10% per year — but only (2) a small number of months or years that the interest rate compounds, then you will NOT accrue so many dollars of interest over the life of the mortgage.

But if you have a small interest rate — say, 5% — but a large number of years that it compounds over, then you could end up paying more interest than the above case where you have a 10% per year interest rate over a small number of years.

The number of payment periods

This is the number of months or years that your loan will be compounding.

The fewer the payments periods, the better it is generally going to be for you in terms of Total Interest Paid. Even with a high interest rate, the absolute number of dollars just won’t have a long time to accumulate.

This is good from YOUR perspective.

And of course, the opposite is true, too. The more payment periods you have — say, 35 years or 50 years — the lower your interest rate could be but still cause you to rack up huge amounts of Total Interest Paid.

Here is one example:

• 15-year fixed rate mortgage with interest rate of 16%.
• Principal mortgage amount of $400,000.
• The monthly payment would be $5,875.
• The total amount of interest paid over those 15 years would be $657,500.
• And the interest would get compounded over a total of 180 months (i.e., 15 years.)

But let’s say you wanted to do a 30-year mortgage instead. 360 months worth of payments.

In this case — 30 years — an interest rate of 8% (half of the above interest rate) would give you a monthly mortgage payment of $2,935. And your total interest paid over the life of the mortgage would be essentially the same — i.e., $656,600.

To sum up the example, a 15-year mortgage would need twice the interest rate of a 30-year mortgage to have the same total interest paid as that 30-year mortgage.

Four takeaways

1. It is worth doing a little bit of math when you’re signing up for your mortgage. You’ll either need some moderate spreadsheet skills or the ability to use an online mortgage calculator. (A mortgage calculator is probably the best option for most people.) Calculate how much Total Interest you will be paying over the life of your mortgage. Then do a little “what-if” analysis to see how much you can save if you pay $100 or $200 extra each month. Use this info in Takeaway #2 (below.)
2. Roughly speaking, with a 30-year mortgage, paying extra each month starts to get interesting enough once the interest rate is around 5%. Anything higher than that, and it only gets more interesting from there.
3. Once you have done your analysis, be decisive. Figure out how much extra you want to pay each month, and commit to doing so, rain or shine. Cancel date nights, compromise on purchases (the new phone probably can wait a year or two; maybe you can get by with a lesser cellular plan or a lower tier of Netflix), etc. Heck, put your kids to work shoveling snow in the winter and mowing lawns in the summer, and let them contribute some/all of their earnings to “the family mortgage payment fund.” If the interest money saved is there to pay for their college or grad school in 20 years, then that is a win for the whole family!
4. And for the first few years — i.e., when the impact of each extra dollar paid toward your mortgage is as high as it can be — do everything you can to pay as much as you can each month. It really is hard to overstate how much of a difference this can make for your family’s financial future. Maybe there are some months where you are just stretched really tight, and you can only pay half of the extra amount you normally do. That’s ok, and the world won’t end. But hopefully there are also other months where you have extra money, and then you can pay 3 or 4 times the extra amount you would normally pay. Bottom line, be as aggressive as you can be in paying extra each month on your mortgage in the first few years. Period. Full stop.

Thank you for reading, subscribing, clapping, and sharing — I appreciate your time and attention.

Jeffrey Goodman

Related and recent articles

• 30Y in 30D, Y16: The Total Cost of Ownership of Your House • 30Y in 30D, Y15: Simple Question, Complex Answer — The True Purchase Price of Your Home • 30Y in 30D, Y14: What Kind of People Are Getting Loans for Houses Right Now? • 30Y in 30D, Y13: What Does It Take to Pay Off a 30-Year Mortgage in 15 Years? • 30Y in 30D, Year 12: CBS News’ Version of (Not) Helping You Save on Mortgage Interest • 30Y in 30D, Year 11: Dream Home or Financial Freedom? Rethinking the True Cost of Stretching • 30Y in 30D • Year 10: A Tale of Two Eras — Home Buying in 1972 and 2023 • 30Y in 30D • Year 9: Visualizing Savings — Mortgage Charts that Matter • 30Y in 30D • Year 8: The Mechanics of Mortgage Interest — What Really Matters • 30Y in 30D • Year 7: The Big Payoff of Early Extra Payments • 30Y in 30D • Year 6: Mortgage Power Play with a Single $100 Extra Payment • 30Y in 30D • Year 5: Are Car Buyers Smarter than Homebuyers? • 30Y in 30D • Year 4: Accelerate Payoff Via Extra Monthly Payments • 30Y in 30D • Year 3: Early Extra Payments Are Magical • 30Y in 30D • Year 2: Rapid Progress on the 30-Year Mortgage •30Y in 30D • Year 1: Starting Strong on the Mortgage Journey • Kickstarting “30 Years in 30 Days” — Decades of Mortgage Wisdom in 1 Month • A Friend Texted to Ask “Who I Favored” for 2024 but Hated My Answer • Has U.S. Healthcare Really Become a Mob Protection Racket?

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