I came across a chart the other day on Instagram that showed how a 30-year fixed is paid down over time.
They chose an interest rate of 6.75% to highlight how slowly a mortgage is repaid over time, with much of balance only paid off toward the end of the loan term.
It displayed key milestones including how many years it takes to pay down 25% of the loan balance, 50%, and 75%.
We all know how long it takes to pay off 100% because it’s simply the loan term, in this case 30 years.
I commented to the author to do one for a 3% mortgage rate because that would result in a quicker pay down of the loan balance due to the lower rate.
But someone said it’s the same because they charge the minimum amount to pay it off in 30 years regardless of rate.
I don’t really know what they meant, but I decided I had to make a post explaining how loan amortization works, yet again.
You Hit Milestones Faster with a Lower-Rate Mortgage
| 30-year fixed w/ $400k loan amount | 3% mortgage rate | 6.25% mortgage rate | Time difference |
| 10% paid off | 4 years 7 months | 7 years one months | +2y 6m |
| 25% paid off | 10y 5m | 13y 11 m | +3y 6m |
| 50% paid off | 18y 4m | 21y 3m | +2y 11 m |
| 75% paid off | 24y 8m | 26y 3m | +1y 7m |
| 100% paid off | 30 years | 30 years | n/a |
Many existing homeowners have 3% mortgage rates that they took out in 2020, 2021, 2022, etc.
Those rates have since disappeared for new home buyers, but they remain in place for millions of homeowners.
And will continue to exist as long as they don’t sell the home, refinance the mortgage, or pay off the loan early.
One hidden benefit to these low-rate loans, other than the lower monthly payment and less interest paid, is that the loan gets paid down faster.
When you have a lower interest rate, less interest accrues.
So even if you borrow the same amount of money, the lower interest rate means a larger portion of the payment goes toward principal instead of interest, despite the total payment being lower!
The opposite is true if you have a high interest rate. More of each payment goes toward the interest instead of principal.
To illustrate this, I compared a $400,000 loan amount on a 30-year fixed set at 3% versus 6.25%.
Basically the interest rate you could get in 2021 and the interest rate you might get today.
The difference is pretty stark. Aside from the much higher monthly payment, $1,686.42
versus $2,462.87, the 3% loan is paid off much faster.
For example, you pay off 10% of the lower-rate loan in about 4.5 years. On the 6.25% loan it takes 7 years.
About 25% of the balance is paid off in 10.5 years on the 3% loan versus nearly 14 years on the 6.25% loan.
And half the loan is paid in just over 18 years versus 21+ years on the higher rate loan.
Simply put, more of each payment goes toward principal each month, despite a lower monthly payment. And it happens earlier because less interest accrues due to a lower rate.
So you get the benefit of a smaller outstanding loan balance faster with the low-rate loan.
Of course, the gap eventually shrinks and both loans are paid off in the same amount of time, just with vastly more interest on the higher-rate loan.
But Both Mortgages Still Take 30 Years to Pay Off!
Now one last thing to tie it all together.
Since both loans are 30-year fixed-rate mortgages, they both last 30 years.
So two borrowers who took out 30-year loans in the year 2020 would pay them off in full in 2050.
In other words, they still take the same amount of time to pay off completely.
However, the way they are paid down is different, as illustrated above.
The composition of payments and the trajectory of the payoff is different.
The 3% loan is whittled down faster, while the 6.25% mortgage is paid down more slowly.
But toward the end of the loan term, the 6.25% mortgage is paying down more principal each month
Why? Because the monthly payment is HIGHER, remember?
The gap eventually narrows because the high-rate loan has larger payments and principal is paid down faster toward the end.
For example, in month 325, a whopping $2,042.78 goes toward principal on the 6.25% mortgage.
Conversely, just $1,541.45 goes toward principal on the 3% mortgage.
But remember, the 3% mortgage only has a total monthly payment of $1,686.42, while the 6.25% mortgage has a monthly payment of $2,462.87.
So it’s a weird concept to wrap your head around since they’re both 30 year loans and more principal is paid monthly on the higher rate loan later in the loan term.
But if you can make sense of all that, you should have a better grasp at how mortgage amortization works!
Read on: If You’re Buying a Home Today, Expect to Keep It for a Long Time
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.
