One of the many choices in loan programs is the amortization (payback) period. No big deal, right? A 30 year or 15 year mortgage is typical, and although both periods are the most popular amortization timetables around, they’re not the only ones. This period can significantly impact both your interest savings as well as your cash flow.

Mortgage loan programs are typically “fully amortized.” In other words, from day one you know both when your loan starts and exactly when it will end, as long as you make the regularly scheduled payments. A fixed mortgage that amortizes over 360 months, or 30 years, has preset mortgage payments equally spaced over that same period. A 15 year loan is also equally spread over 15 years, or 180 months. But there’s more than just the elapse of time that’s at issue here. It’s also about money.

Many folks, when considering which term to take, typically take into account the difference in monthly payments. At the same time, those folks are surprised at how dramatic the change in monthly payments.Even though the interest rate on a shorter term is usually lower. For instance, take a 6.00% 30 year fixed rate on a $200,000 loan and the monthly payments are $1,193 dollars. For a similarly priced 15 year fixed loan at 5.75%, the payments inflate to $1,652. An increase of nearly 40%! Often this increase in monthly payment stops people from choosing a 15 year loan and take the standard 30 year product instead.

Why are payments higher on a 15 year loan even though the rate is lower? Because the amortization term is squished in half. With a 30 year mortgage there’s plenty of time to spread out interest payments but when you cut the term in half, then payments must increase to both meet the term and accommodate the interest over 180 months. But did you know a little secret? There are other terms out there, you just have to ask.

One of the many reasons to choose a shorter term loan is the savings of long term interest. Using the above example, a 30 year mortgage, when taken to term, pays your lender nearly $230,000 in interest. A 15 year fixed on the other hand only yields a little over $97,000 in interest payments. That can make a 15 year loan attractive by providing a lower rate and a significant savings in interest. But again, the shorter tem can make this choice prohibitive.

If that’s you, choose a 20 year mortgage. No, you may not find rate quotes on the Internet or in the newspaper for a 20 year loan but I”ll bet your lender offers one. How are they priced? Many lenders simply keep the rate the same but shorten the payback period. Using our example a 25 year loan payment at 6.00% would be $1,282 per month. Slightly higher than a 30year loan but still saving over $45,000 in interest. A 20 year loan would save you $87,800 in interest yet only raises your monthly payment by a couple of hundred dollars instead of nearly $400.

Most any lender will offer a different amortization period than a 30 year or 15 year fixed, although most limit these changes in amortization term in five year increments with a 10 year minimum. So you could choose a 5, 10, 15, 20, 25 or 30 year term. Some lenders will even amortize your loan up to 40 years. But you usually have to ask for different terms. Don’t assume that just because you only see 30 and 15 year rate quotes that there’s nothing else available. There usually is. But you have to ask.

Published: December 13, 2002

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.