Monthly Payment vs Total Cost of a Mortgage
A lower monthly payment can cost more over the life of a loan. Here is how to compare a payment against the total a mortgage actually costs.
A mortgage offer is usually presented as a monthly number, and the monthly number is a poor way to compare two offers. It is a good way to check that you can afford something, and a bad way to work out which one costs less.
The reason is that a monthly payment is a function of three inputs, and changing any one of them changes the payment while leaving the loan’s total cost moving in the opposite direction.
Why the payment is a misleading number
Consider two loans on the same house, at the same rate:
- Loan A: $360,000 over 30 years at 6.5 percent — about $1,986 a month
- Loan B: $360,000 over 15 years at 6.5 percent — about $3,108 a month
Loan B costs $1,122 more every month. Over the life of the loan, Loan A costs roughly $355,000 more in interest. The shorter loan buys a monthly payment that is 57 percent higher, and in exchange the total interest falls by a little over half.
Neither is better in the abstract. They are better for different circumstances, and the circumstances are not arithmetic. But the two facts above are arithmetic, and they are the facts a comparison needs.
The four numbers worth comparing
A mortgage comparison is clearer with four numbers rather than one:
- Monthly principal and interest — what leaves your account each month.
- Total interest — the cost of the loan, over its whole life.
- Total housing cost — everything you pay to live in the property over the life of the loan: principal, interest, tax, insurance and HOA.
- Payoff date — when the loan is actually finished.
The mortgage payment calculator reports all four. The payoff date is the one that is most often left out, and it is the one that shows the effect of a term change most clearly.
The trade-off a term change makes
A longer term lowers the payment and raises the total. The mechanism is simple: the balance stays higher for longer, and interest is charged on the balance.
The trade is not linear. Moving from 15 years to 30 years more than doubles the payment. Moving from 30 years to 40 years does not double anything, and it increases the total interest substantially, because the balance is higher for a decade longer. The first decade of a mortgage is where nearly all of the interest is charged, and a term that extends that decade is expensive in a way that the payment alone does not show.
What the rate does to the same comparison
The rate has a similar shape of effect. On the same $360,000 over 30 years, moving from 6.5 percent to 7.5 percent changes the monthly payment by about $90 and the total interest by roughly $60,000. A rate difference of one percentage point sounds small and is not, over thirty years, because it applies to a balance that stays high.
This is why rate comparisons use total figures. The Freddie Mac Primary Mortgage Market Survey publishes the rate series most often used as a reference point, and Fannie Mae’s research pages carry the equivalent commentary.
What belongs in the comparison and what does not
Some costs belong in a mortgage comparison and some do not.
In the comparison: principal, interest, property tax, insurance, HOA, and the cost of the money used for the down payment, because it is not available for anything else while it sits in the house.
Outside the comparison: the value of the home itself, and the tax treatment of the sale. The first is an asset, not a cost, and the second depends on circumstances the page cannot see.
Points sit awkwardly. They are a fee paid now in exchange for a lower rate later, and they belong in a total-cost comparison because the fee has to be recovered through lower payments. The tools on this site do not model them, so a comparison involving points needs that part done separately.
The comparison you can actually run
Put both offers through the calculator with the same property tax, insurance and HOA inputs, and read three numbers: the monthly payment, the total interest and the payoff date. Then run the same loan with a larger down payment and see whether the total interest moves by more than the money released would earn elsewhere. That is a comparison rather than a feeling, and it is a comparison the arithmetic can settle.
Sources
These are the primary sources behind the figures and the method in this guide.
Calculators behind this guide
Common questions
How do I compare two mortgage offers?
Run each one through the calculator and compare the total interest and the total housing cost, not the monthly payment. A lower monthly payment over a longer term usually comes with more total interest, because the balance stays higher for longer.
Does a bigger down payment always save money?
It reduces the amount borrowed, which reduces the interest. Whether that is the right trade depends on what the down payment money would otherwise do, and on the rate and the term, which is why the comparison is worth running rather than assuming.
Should I include property tax in the comparison?
It belongs in the total housing cost rather than in the loan cost, because it continues after the loan is paid off. The calculator reports it separately for exactly this reason.
What about points?
Points are a fee paid at closing in exchange for a lower rate. They belong in a total-cost comparison, because the fee has to be recovered through lower payments over the life of the loan. The calculator does not model them, and the guide on closing costs covers them.
How does inflation change this comparison?
It changes what the payment means relative to your income, not what the loan costs. The total interest figure is a real number in the dollars of the day the loan is taken out.
Is the total interest the whole cost?
No. Total interest is the cost of the loan. Property tax, insurance, HOA and maintenance are additional, and the calculator reports total housing cost so the two can be seen separately.