For many homebuyers, choosing between a 15- vs. 30-year mortgage is a key consideration.
The most popular mortgage product is a 30-year, fixed-rate loan, according to Freddie Mac. However, a shorter-term loan, such as a 15-year mortgage can offer big savings on interest over the loan and help you build equity faster — provided that you can afford it.
Comparing a 15- vs. 30-year mortgage
Simply put, a 15-year mortgage
has a repayment term that lasts for 15 years while a 30-year mortgage
has a 30-year repayment term. Because you have less time to repay a 15- vs. 30-year mortgage, the principal and interest portion of your monthly mortgage payment are higher.
On the other hand, 15-year mortgage rates are typically lower than 30-year mortgage rates, which saves you on interest paid over the life of your loan. Let’s look at an example, using a 15- vs. 30-year mortgage calculator
for a $200,000 loan:
15-year mortgage 30-year mortgage
Monthly payment (principal and interest)
Total interest paid
As the table shows, a 0.55% difference in interest rates between a 15- vs. 30-year mortgage translates to a $475 difference in monthly mortgage payments, and a difference of more than $80,000 in total interest paid.
Pros and cons of a 15- vs. 30-year mortgage
Before committing to a loan term, it’s necessary to understand its benefits and drawbacks. Make sure you compare the following pros and cons of a 15- vs. 30-year mortgage and weigh them against your needs and monthly income.
Pros + Cons:
- Interest rates are typically lower
- Pay off your mortgage faster
- Pay less in interest over the life of the loan
- Larger monthly payment
- Housing budget may be more limited
- Less monthly cash flow for savings or other financial goals
- Lower monthly payment
- More time to repay mortgage
- Possibly afford a more expensive home
- Interest rates are typically higher
- Pay more in interest over the life of the loan
- Build equity at a slower pace
Who a 15-year mortgage is best for
A 15-year mortgage might be best for you if:
- You want to get rid of your mortgage sooner. A 15-year mortgage has a shorter amortization term than a 30-year mortgage. If you’d prefer to pay off your mortgage sooner rather than later, it might be worth it to choose a 15- vs. 30-year mortgage.
- You can comfortably afford a higher monthly mortgage payment. Your monthly principal and interest payments will be significantly higher on a 15-year loan. Choosing this mortgage term could fit your situation if you can manage a hefty monthly payment and still afford to cover your other monthly obligations without overextending your budget.
- You want to build equity more quickly. You’re paying more toward your principal each month with a 15- vs. 30-year mortgage, which allows you to build equity in your home at a faster pace. Having access to more equity means you can later use a cash-out refinance, home equity loan or home equity line of credit to pursue other financial goals. It also means you’ll own your home free and clear much sooner.
Who a 30-year mortgage is best for
A 30-year mortgage might be best for you if:
- You want a lower monthly mortgage payment. Your repayment term is longer with a 30-year loan, which spreads out your mortgage payments and makes them more affordable.
- You want the stability of lower housing expenses to budget and free up cash. A lower monthly mortgage payment gives you more wiggle room month-to-month for budgeting and focusing on other financial goals, such as boosting your emergency fund or retirement savings.
- You want the option to pay off your mortgage faster without being tied down. If you borrow a 15-year loan, you’re committing to a higher monthly mortgage payment for the entire loan term. However, a 30-year mortgage gives you the flexibility to pay extra money toward your principal and shave time off your repayment term whenever you have the financial bandwidth to do so.
Should you choose a 15- or 30-year mortgage?
Choosing a 15- vs. 30-year mortgage really comes down to your preferences for managing your mortgage payments and overall financial goals. Be sure to keep the following considerations in mind when weighing a 15- vs. 30-year mortgage:
15-year or 30-year mortgage: Which should you choose?
Choose a 15-year mortgage if:
- You want to get rid of your mortgage sooner.
- You can comfortably afford a higher monthly mortgage payment.
- You want to build equity more quickly.
Choose a 30-year mortgage if:
- You want a lower monthly mortgage payment.
- You want stable, long-term housing expenses to budget and free up cash.
- You want the option (not the requirement) to pay off your mortgage faster.
This is good food for thought but talking to a lender about your custom situation is really going to provide more pertinent information for your homeowner goals. So, get in touch if you’d like some Realtor recommendations and we can work together towards meeting your homeowner goals!