How much interest will I pay over the life of a mortgage?

Interest can work for or against you. In this question, you will explore how the interest rate, and duration of a mortgage affects the total amount of interest that you will pay.

Step 1: Download the Loan Calculator Download Loan Calculatorspreadsheet.

The first tab is a mortgage (home loan) calculator that I created for you. You can change the numbers in the gray boxes to find out how much your monthly payment, total interest, and total payments over the life of the loan would be for loans for different amounts of money, different durations, and different interest rates.

Step 2: Use the Loan Calculator spreadsheet to answer the following questions (the answers you need will be in the yellow shaded cells after you enter the required information):

Assume you purchase a home for $370,000. You have saved $20,000 to use as a down payment (so you will need a $350,000 loan) and you can get an interest rate of 3.8%.

If you get a 30-year loan (for all answers, round to the nearest dollar and don't use dollar signs):

How much will your monthly payments be?

How much interest will you pay over the life of the loan?

How much will you pay in total (principal and interest) to pay back the loan?

If you get a 15-year loan (for all answers, round to the nearest dollar and don't use dollar signs):

How much will your monthly payments be?

How much interest will you pay over the life of the loan?

How much will you pay in total (principal and interest) to pay back the loan?

Takeaways:

The longer the loan duration, the more interest you will pay over the life of the loan. Notice the pie chart at the top right of the Loan Calculator spreadsheet - it shows how much interest you will pay compared to the total value of your loan, given the assumptions you entered in the gray cells. Play around with the assumptions and see how the pie chart changes.

If you get a 30-year loan, you can reduce the loan length (and save a lot of interest) by making larger payments each month than required. For example, if you get a 30-year loan, but make payments that are as big as the 15-year-loan payments each month, you would pay your loan off in 15 years. This is a way to give yourself flexibility (by not locking yourself into the higher 15-year-loan payments), but still pay the loan off in 15 years. But it does require you to be disciplined enough to really make the higher payments consistently, even though you don't have to.