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15-Year Mortgage vs 30-Year Mortgages

You’ll pay far less interest on a 15-year mortgage, but the bigger payment can mean less financial flexibility. These are a few questions to ask yourself when deciding between a 15-year and 30-year mortgage.

If you can afford tha payments, 15-year mortgages will save you bundles over a 30-year loan.The home buying process is full of decisions, even before you start looking at houses. Who should your agent be? Who should your lender be? What type of loan should you get?

Though figuring out the answers to so many questions can at times be extremely stressful, it is also imperative that you make the right choices.

If your lender asks whether you are applying for a 15-year mortgage or a 30-year mortgage, don’t just choose the 30-year because it’s the most common.

If you can afford a 15-year mortgage you could save yourself thousands of dollars over the life of your loan.

Even though the monthly payments on a 30-year mortgage are lower, with the interest rate being paid 15 years longer than a 15-year mortgage, a 30-year mortgage will end up costing you significantly more money over time. Understanding concepts like these are how the wealthy stay wealthy.

How much can you save with a 15-year mortgage vs 30-years?

For example, let’s take a loan amount of $300,000, at a fixed rate of 4.5 percent interest, payable at 12 monthly payments of $1,520 over 30 years. Over the life of the loan, you’ll end up paying $247,220 in cumulative interest. With the same loan amount and terms, except payable over a 15-year loan and a $2,295 monthly payment, your cumulative interest is only $113,096.

Talk about savings — that’s a difference of $134,123, a pretty nice chunk that could go into your retirement account, your kids’ college funds, or even to finance improvements on your house.

Another point is that interest rates are typically lower on a 15-year mortgage. So with a 15-year loan, not only do you get a lower interest rate, but you also have 15 fewer years of paying interest, compared to a 30-year mortgage. The ultimate goal of creating equity and then owning the house free and clear is of course obtained must faster through a 15-year mortgage than through a 30-year.

The downside is that your payments are going to be significantly higher with the 15-year loan. For some buyers, the only way to afford the payments on a 15-year mortgage is to get a much smaller house than they were originally imagining. It’s all a matter of keeping well within the confines of your household’s budget.

Let’s break down the benefits of 15-year mortgages and 30-year mortgages:

Why go with a 15-year mortgage

  • Build equity and pay off your home faster
  • Lower interest rate
  • Pay less interest over the life of the loan

Why go with a 30-year mortgage

Extra mortgage payments as an alternative to a 15-year loan

Maybe you already have a 30-year mortgage but don’t want to (or can’t) refinance. Here’s a bit of a middle ground. Make extra payments on your 30-year mortgage whenever possible. Put your annual bonus toward your mortgage. Plan to make at least one extra payment per year.

The amount of money you’ll save depends on the specifics of your loan. Take the following example from Kiplinger.com:

Making one extra payment on a 15-year, $300,000 mortgage with a 5 percent interest rate breaks down to about $200 extra per month. If you pay $2,572 each month instead of the required $2,372, for example, you can cut the number of payments down from 180 to 161 (from 15 years to 13.4) and the total interest paid from $127,029 to $111,653. The higher the interest rate, the more you’ll save by making extra payments.

Risks with 15-year mortgages

Generally speaking, the idea of paying off your mortgage in half the time is a wise one. But of course, if you choose to buy the same house and go for much higher payments, you could be putting your finances at risk.

Sure, everyone wants to save money on interest and pay off their home faster, but what if an emergency comes up? Would you still have enough money for your emergency fund? Would you still be able to contribute to your retirement account or your kid’s college fund if you end up going with a 15-year mortgage?

If you can do both, great! But not everyone can.

There is no one right answer, but these are factors to consider. Certainly, I would have loved to be able to get a 15-year mortgage. But I decided to get a 30-year mortgage so that I could simultaneously contribute to my emergency fund, my self-directed 401k and my son’s college fund.

What about you? Do you have a 15-year or 30-year mortgage? Why did you choose it?

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.

Comments

  1. Great article. What about a loan term somewhat in the middle such as a 20 year loan? My wife and I did a 20 year loan just over a year ago. Our thought process was that on the 20 year we would be paying about the same monthly payment we were on our rent at the time (we were able to put a nice down payment and avoid PMI so that helped lower the payment as well). Had we gone with a 30 year loan we would have been able to ‘save more’ and have more flexibility and the 15 year loan would have ‘tied’ us up a bit so we settled on the 20 year loan. One thing we had to consider was that the interest savings from a 30 to 20 year loan are not as great as a 30 to 15 year loan.

  2. Hi there–great article. One thing to add is the consideration of opportunity cost with a 15-year mortgage given the current state of interest rates. (4.25%ish as of comment) Under normal circumstances, the real interest rate (APR) on your mortgage should be roughly the same as the inflation-adjusted return on a well-balanced, diversified, index-based portfolio. But in today’s environment your assets will most likely grow much faster in the market than your mortgage interest rate. It looks like arbitrage, but it tilts the scales somewhat (in my view) in the points mentioned in the “financial flexibility” section.

  3. I don’t understand this quote:
    “For example, let’s take a loan amount of $300,000, at a fixed rate of 4.5 percent interest, payable at 12 monthly payments of $2,295 over 30 years. Over the life of the loan, you’ll end up paying $247,220 in cumulative interest. With the same loan amount and terms, except payable over a 15-year loan and a $1,520 monthly payment, your cumulative interest is only $113,096.”
    2 loans, both for $300k. One is a 30 year loan with monthly payment of $2,295. The other is a 15 year loan with monthly payment of $1,520?? How can the 15 year loan have a lower monthly payment if the loan is for the same amount? And what does “12 monthly payments” mean?

    • I think the article is in error. The 2295 payment should go with the 15 year loan, and the 1520 payment should be with the 30 year loan. The savings of $113,096 is correct.

      • Right. I had to read it three times because Money Under 30 usually has the right numbers. If the 15 year payment was that much less and you could save that much in interest over the life of the loan it would be a no brainer!

      • David Weliver says:

        You are correct, thank you, the payment figures were reversed. We’ve fixed it.

  4. Another alternative to the 15 year loan would be to get a 30 year loan but pay the monthly payment of a 15 year loan. This would keep you on track to pay off the mortgage in 15 years, but in case of an emergency you could adjust your payment down to the 30 year number as needed. In the given example where the interest rate is the same, functionally there is no difference. Of course 15 year mortgages normally come with a lower rate. If we assume that the 15 year loan has a rate 3.5 (vs. 4.5 for the 30 year loan), This plan still provides a maximum savings of about $107,000 in interest vs. a normal paying the normal payment on a 30 year loan.

  5. I purchased a house in October 2012 and decided to go with a 30 year loan. The difference in payment was approximately $250. I would have easily been able to affor the 15 year payments, but I decided to use a 30 year loan instead, here is my thinking:

    Shortly after purchasing the home, I opened a taxable brokerage account with Vanguard. I have it setup to automatically deposit $250 per month into the account (which is a mix of S&P 500 index fund and a bond market index fund). So far, so good, my home value is appreciating along with my brokerage account. I believe in 30 years I’ll be patting myself on the back for going with the 30 year loan and a separate investment into the stock market. I can pay off the house early if I want to, I left myself with the choice, instead of the bank.

  6. 15 year loans are WAY better for your wallet. Another perk is that you usually end up buying less home. Many folks that take on a 30 year loan take on too much house and too much debt. Only considering homes that you can afford with a 15 year mortgage will help your overall finances considerably and will help ensure that you aren’t taking on a debt that is too much for you. All that being said, I have two homes. One with a 30 year loan and another with a 15. I like having both because I feel like I’m hedging my bets. Great post Sarah. Thanks for the tips!

  7. I like the article as it gets people thinking about how much they are potentially saving in interest with a 15 year loan but there is nothing mentioned about what type of return they could expect if they took the 30 year and invested the monthly payment difference of $775. “Talk about savings — that’s a difference of $134,123, a pretty nice chunk that could go into your retirement account, your kids’ college funds, or even to finance improvements on your house.” Although this is true you will save $134k in interest over the course of the loan you can make that same amount (likely more) if you invest the $775 every month for 15 years. I know people stuggle with extra money but it should be pointed out that a 30 year loan makes sense financially at such low rates if you invest the difference.

  8. I have been looking at buying a house, and another way I think about this is related to the fact that I doubt I will live in my first house 15-30 years. I heard somewhere that the average people live in a house is 7 years. So I looked at a $280,000 loan. At 4.35% for 30 years, after 7 years of making $1393/mo payments, I would still owe ~$243K on my house. Since more of your payments goes to interest in the beginning, in the first 7 years, after paying $117K, I would have only got ~$37K off my loan. With a 15 year loan at 3.25%, the payments were $1967/mo, but after 7 years, I would owe $166K on the house. I would have paid out $165K, and gained ~$114K in equity in my home. So if I sold after 7 years (assuming the housing market didn’t go down!!) I would get my down payment, plus ~$114K towards my next home, rather than my down payment plus $37K. It seems like a good idea to me. I even would consider reducing my retirement savings to do this, since owning a home outright would be a big help in retirement.

  9. We went with a 30 year for the increased flexibility. Our rate is also a mere 3.25%, so early payoff is a low priority except if cash flowing self employment or early retirement becomes an issue. In the meantime, it gives us a bit more free money to put towards repairs (fixer upper), improvements (blacksmith forge?!?) and other priorities (self employment!). For us, the difference between a 30 and 15 year mortgage is the difference between the ability to survive on only one income or not. Hopefully, this won’t be necessary, but it’s rather comforting to know that we CAN.

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