15 vs. 30 year mortgage overview
Most borrowers choose a 30-year fixed-rate mortgage, which gives them three decades to pay off their home.
You can also opt for a shorter term, such as a 15-year mortgage. This will pay off your loan debt in half the time and probably save tens of thousands in interest. But your monthly payments will increase significantly.
So what's the best choice for you: a 15 or 30 year mortgage? It depends on several factors, including your financial situation, your goals in life, and what you can afford.
Compare 15 and 30 year mortgages. Start here (08/17/2021)
In this article (continue to …)
Is a 15 or 30 year mortgage better?
For many, a 30 year mortgage loan is the ideal product. That's simply because it allows for more affordable monthly payments. The downside is it may take longer to build equity and pay off your loan.
This is why some homeowners opt for a shorter loan term in the form of a 15 year mortgage.
"You can pay off the loan twice as fast, over the life of the loan you pay much less interest, and your home equity grows much faster," said Robert Johnson, professor of finance at Heider College of Business, Creighton University.
However, that doesn't mean that a 15 year loan is always your best bet.
The main disadvantage of a 15 year mortgage is that the monthly payments are much higher since you have to pay off the same amount in half the time. As a result, many homeowners just can't swing the monthly payments.
It's up to you and your loan officer to compare the costs – and potential savings – of a 15 vs. 30 year mortgage and then choose the right one for your financial situation.
Compare 15 and 30 year mortgages. Start here (08/17/2021)
Interest rates for 15-year vs. 30-year mortgages
Traditionally, a 15 year mortgage loan is offered at a lower interest rate than a 30 year mortgage loan. That's because 15-year-old borrowers pose less risk to mortgage lenders by agreeing to pay off their debt more quickly.
"The interest rate differentials between 30- and 15-year options averaged between 0.5% and 0.75%," says Rob Heck, Head of Origination at Morty.
Just look at how 15 and 30 year mortgage rates compare over the past six months, based on survey data from Freddie Mac:
Monthly mortgage payments for 15- vs. 30-year loans
The mortgage payments on a 15 year loan will likely be several hundred dollars more than on a 30 year loan.
"Imagine taking out a $ 250,000 loan at 2.50% over 15 years," said Tom Trott, branch manager at Embrace Home Loans. "Your monthly principal and interest payments are $ 1,667."
On the flip side, "a 30-year mortgage on the same 2.99% loan amount will trigger monthly payments of $ 1,053 – $ 614 less," he explains.
The exact payment amounts will of course depend on your creditworthiness, down payment, interest rate and other factors. So it pays to compare both types of credit before buying to see how your options break down.
Comparison of long-term mortgage costs
After all, you pay much less total interest cost on a 15 year loan than you would on a 30 year mortgage.
There are two reasons. First, because your interest rate is likely to be lower. Second, because you haven't paid interest for so long.
In the Trott example above, you'd pay around $ 129,000 in total interest on a 30-year loan, as opposed to about $ 50,000 on a 15-year loan – saving over $ 78,900 with the shorter term .
You can use a mortgage calculator to model your monthly payments and total interest for both loan types to see how they compare.
Advantages and disadvantages of a 30 year mortgage
Choosing a 30 year mortgage can be a smart move for many.
“A 30 year mortgage is the most popular option for homebuyers in the United States. Payments are stretched over twice as long, resulting in lower monthly payments, ”says Heck.
“These lower payments make it easier to afford a home or buy a larger home and still stay within your budget. It also enables home buyers to use the money saved for other household and living expenses, ”explains Heck.
The main disadvantage of a 30 year term is that you commit to making payments over a longer period of time. That means you will pay much more interest over the life of the loan and your home will build up much more slowly.
As a result, you will make less profit if you sell your home before your loan is paid off – especially within the first 5 to 10 years after owning the property.
"Another downside is that since your payments are lower than a 15-year mortgage, you can streamline that you can commit to buying a larger home and borrow more for a longer period of time," warns Johnson.
After all, longer terms are usually associated with slightly higher interest rates. This helps ensure that you pay more total interest throughout the life of your mortgage.
30 year mortgage advantages30 year mortgage disadvantageLower monthly paymentsMore interest throughout the life of the loan Potentially larger budget to buy a home Slightly higher interest rates than 15 year fixed-rate mortgagesMore cash flow for investments, retirement plans, renovations, and more Builds home equity more slowly
Check your 30 year mortgage eligibility (August 17, 2021)
Advantages and disadvantages of a 15 year mortgage
Choosing a 15 year mortgage loan also has its good and bad sides.
“You would pay off your debt faster, build equity faster, and likely get a lower interest rate because of the faster amortization schedule. A 15 year mortgage is one of the best ways to reduce mortgage debt, and it can save homebuyers thousands of dollars in interest paid, ”notes Heck.
Trott explains that over the life of a 15-year loan, "approximately 17% of your total payments will be used for interest, while approximately 34% of your payment will be used for the interest of a 30-year loan."
The biggest downside to a 15 year loan, however, is that your minimum monthly mortgage is significantly higher – probably by several hundred dollars.
During the life of a 15-year loan, "approximately 17% of your total payments will be used for interest, while approximately 34% of your payment will be used for the interest of a 30-year loan". –Tom Trott, Branch Manager, Embrace Home Loans
"The higher monthly rates on a 15-year mortgage can mean you qualify for a cheaper loan and opt for a smaller house or miss out on a dream location," added Heck.
"It could also cause borrowers to overcharge their home payments in the event of an unexpected expense or life event that changes their monthly income," he continues.
In addition, taking out a 15 year mortgage loan can mean that you have less money to spend on other investments, such as
"If your mortgage payments are so high a percentage of your monthly income that you can't fund your retirement account or your child's college education, it may be wise to take out a 30-year mortgage instead," suggests Johnson.
Keep in mind that the extra money you pay each month with a 15 year loan could instead be used to invest in the stock market or retirement accounts, which can produce higher average returns over those 15 years.
15 year mortgage advantages15 year mortgage disadvantageLower interest rates than 30-year fixed-rate mortgages. Higher monthly payments. Lower total cost of interest over the life of the loan. Less cash for investments, emergency funds, and other expenses
Check your 15 year mortgage eligibility (August 17, 2021)
Which repayment term should you choose?
The right mortgage term for you will depend on your monthly budget, as well as your age, income, savings, and financial goals.
Jake Maier, a senior mortgage lender at American Bank of Missouri, says good candidates for a 15-year mortgage are those who:
Can easily afford the higher monthly payments; want to pay off their home earlier; want to build up equity faster; and have the cash flow to cover the debt burden and additional costs of owning a home
John Li, Co-Founder and CTO of Fig Loans, adds that "older adults who are about to retire may choose a 15-year mortgage and make aggressive payments so that their home is paid off or sooner paid off when they retire" .
However, Johnson cautions against choosing a 15-year mortgage “unless you are in a strong financial position to fund other life goals like retirement accounts and children's education funds.
"If a shorter mortgage can't finance these other life goals, a 30-year mortgage is probably a better choice," says Johnson.
Younger adults with long working lives to go should also probably opt for a 30-year mortgage, "especially if they're just starting their careers and earning entry-level salaries," Li adds.
One final thought, you can always take out a 30-year mortgage loan and either refinance for a 15-year term or make additional payments on the principal balance at any time (provided your mortgage loan doesn't have prepayment penalties, which most don't have).
If you stick to a disciplined and aggressive expedited payment schedule, you could likely be able to pay off your 30 year loan in 15 years or less, if you so choose.
The bottom line
It is worth exploring 15 and 30 year mortgage loans. Whether you're a first-time buyer or a homeowner refinancing, each type of loan can have pros and cons.
Let your loan officer guide you through the monthly payments and total costs for each loan type, as well as the short-term and long-term savings. Then choose the right repayment term for your personal finances.
Confirm your new price (August 17, 2021)