Fixed-rate mortgages are the simplest and most popular home loans, and they prevent the surprises that can come with adjustable-rate mortgages when your interest rate is subject to increase. But you still have a choice to make. Should you take out a 15-year mortgage or a 30-year mortgage?
A 15-year mortgage minimizes your total borrowing costs and allows you to eliminate your mortgage debt relatively quickly. But a 30-year loan has lower monthly payments, allowing you to save for other goals and pay unexpected expenses.
Whether you’re thinking long-term or short-term, deciding how long you want to commit to your mortgage can affect your finances for years to come. Weighing the pros and cons of a 15-year mortgage can help you make the decision.
You’ll get a lower interest rate and pay less interest overall over the life of the loan.
You’ll build equity in your property more quickly.
Your mortgage is less likely to be underwater if you’re forced to sell.
Your monthly payments will be higher because you’re squeezing all that principal into a shorter term.
Making higher mortgage payments might prevent you from saving for things like retirement or emergencies.
You’ll be at risk of default and foreclosure if life throws you a curveball, like a job loss, so you can’t meet your higher monthly payments.
Your Monthly Payment
At first glance, the most noticeable difference between a 15-year and 30-year loan is the required monthly payment. 30-year loans feature a lower payment. Other less noticeable differences are also significant.
Can You Qualify?
A 15-year mortgage might not be affordable for you, depending on your income and the size of your down payment.
- It might be appealing to stretch out your payments over 30 years instead of 15 if you’re concerned about your monthly cash flow.
- Lenders approve your loan application based in part on your ability to repay the loan. They compare your monthly income to your monthly debt payments. Even if you feel comfortable with the 15-year payment, your debt-to-income ratio might disqualify you for these loans.
Consider Your Other Goals
If you’re saving for retirement, a 30-year mortgage makes it easier to fund that goal. Instead of making a hefty mortgage payment every month, you’ll have more free money in your budget to put toward long-term goals.
Of course, if you go with a 30-year loan and you spend the money on “wants” every month instead, you might be better off with a 15-year loan.
You’ll Have Some Flexibility
A 30-year loan helps you keep your options open and absorb life’s surprises. If you change jobs—or lose your job—you’ll probably appreciate that lower monthly payment.
How Fast You Can Repay
A 15-year mortgage helps you pay down your loan balance quickly. You’ll make a bigger dent in your debt than you would with a 30-year loan with each monthly payment. You’ll owe less money at any given point in time, which offers several benefits:
- You build equity more quickly, which you can use for your next home purchase or other needs.
- It’s easier to refinance with a lower loan-to-value ratio.
- You’re less likely to be underwater if you find that you have to sell your home.
Plus, you can stop making mortgage payments after 15 years instead of letting them linger for 30 years if you stay in your home.
You’ll pay less interest with a 15-year mortgage than you would on a 30-year mortgage. Two factors work in your favor.
- The interest rate: 15-year loans typically have lower interest rates than 30-year loans, so you’ll pay less interest right from the beginning.
- Lifetime interest costs: The longer you borrow, the more interest you’ll pay, and your loan balance—the amount you pay interest on—remains higher for longer. Look at an amortization table showing monthly payments, monthly interest charges, and your running loan balance to see how the process works.
The graph below illustrated the difference in principal and interest rates in 15-year and 30-year mortgages.
An Example: 15-Year vs. 30-Year Comparison
Assume you borrow $200,000 to buy a home, and you can choose between a 15-year and 30-year mortgage.
- You can take a 30-year fixed-rate loan with a rate of 4.10 percent.
- You can take a 15-year fixed-rate loan with a rate of 3.43 percent.
The 30-year loan has a lower monthly payment.
- 30-year payment: $966
- 15-year payment: $1,432
You’ll pay down the balance faster with a 15-year loan.
- Remaining loan balance on the 30-year loan after seven years: $172,513
- Remaining loan balance on the 15-year loan after seven years: $119,674
You’ll pay less interest with a 15-year loan.
- With the 30-year loan, you’ll pay $147,903 in interest costs over the life of your loan.
- With the 15-year loan, you will pay only $56,122 in total interest costs.
See the mechanics behind your monthly mortgage payment and learn the basics of payment calculations by using one of the many free online calculators.
If the 15-year payment is too intimidating, you can get a 30-year loan and pay extra every month instead. Just calculate your payments as if you have a 15-year mortgage, then make that higher payment unless and until an emergency prevents you from doing so.
This strategy gets you out of debt sooner, and you’ll pay less interest than you would on a 30-year mortgage. But if you want to spend the absolute minimum on interest, commit to the 15-year mortgage so that you get the lowest possible rate from the start.