Buying a house is likely one of the biggest purchases you’ll make in your life.
And, for most of us, it most definitely isn’t going to come cheap.
This means that you probably aren’t paying cash for a house these days, which then means extra expenses like interest and lender fees will add even more to the total cost of buying your home (learn about all of the costs in our article: 10 Costs Not To Forget About When Buying A Home).
When dealing with such a large amount of money, it’s more important than ever to choose a mortgage that makes the most financial sense for you.
Here is the difference between a 15-year mortgage and a 30-year mortgage.
Differences between a 15-year mortgage and a 30-year mortgage
Lenders let you choose your home loan term when applying for a mortgage, which is the period of time over which you’ll repay the balance.
The two most common options? 15-year and 30-year mortgages. And both types of home loans tackle the question of affordability in two different ways.
A 15-year mortgage costs you less in the long run because you pay off the house in half the time that you would with a 30-year mortgage.
In other words, you’ll end up paying interest for 15 fewer years. As you’ll see in a minute, that adds up to a lot of money.
Plus, interest rates for 15-year mortgages are typically lower than a 30-year option, which saves you even more.
That said, 30-year mortgages are more affordable in the short term since they spread your debt out over a longer period of time.
A 30-year mortgage term makes homebuying more accessible, even though you end up paying more in interest than if you took out a 15-year mortgage.
Comparing two mortgage terms
For this scenario, let’s assume a home price of $340,000. The average Millennial buyer makes a down payment of about 8%, so I’ll also assume the loan amount on this purchase is $312,800 (with an 8% down payment of just over $27,000).
Here’s where things start to diverge.
I’ll use two different interest rates for each loan term:
- 2.21% for a 15-year mortgage.
- 2.77% for a 30-year mortgage.
All of these variables may seem like they’re leading to a math equation, but don’t worry. You can simply plug the details into MU30’s Simple Mortgage Calculator to quickly compare different mortgage terms.
Here’s how each mortgage stacks up for our hypothetical homebuyer.
15-Year Mortgage 30-Year Mortgage
Monthly payment (principal and interest only) $2,043.28 $1,280.29
Total interest paid over loan term $54,991.22 $148,106.03
As you can see, a 30-year mortgage for the same house will cost over $93,000 more than the 15-year mortgage. But, your monthly mortgage payment would be nearly $800 less with the 30-year option — that’s a major difference in your everyday budget.
For many people, choosing a 30-year mortgage over the 15-year option could be the difference between affording a home and continuing to rent.
When to consider a 15-year mortgage
If your emergency savings are solid
Since you’ll be paying more each month for your mortgage, you’ll have less wiggle room in your budget to handle surprise expenses.
Make sure you have at least three to six months of expenses saved in an emergency fund, just in case you lose your job.
Read more: 5 Ways To Jump-Start Your Emergency Fund
If you can keep saving while covering your mortgage
A 15-year mortgage can be a smart money move, but not if it puts your short-term financial health at risk. Consider this option if you can comfortably afford the monthly payment without sacrificing your ability to save elsewhere, including your retirement savings.
If you want to tackle debt quickly
A 15-year mortgage could be a good option for people who are passionate about tackling debt quickly and aggressively. You’ll save a lot of money on interest over time and cut your loan term in half.
The pros and cons of a 15-year mortgage
- You’ll pay less for your house over time. The cost of interest payments goes down when you pay over 15 fewer years.
- You’ll get a lower interest rate. 15-year mortgages come with lower rates than the 30-year option.
- You’ll build equity in your house faster. More of your monthly payment goes towards the principal rather than interest. If you sell your home, you’ll get back a lot more cash.
- You can apply for home equity financing. If you stay in the home, you can access home equity financing products when you have a larger ownership stake in the property.
- You’ll become debt-free much sooner. Not having a house payment can set you up for long-term financial security as you get older and retire because you won’t have a mortgage payment to worry about.
- Your monthly mortgage payment will be higher. Spending more on your mortgage could impact other areas of your finances, like your savings.
- You may have difficulty qualifying for other types of financing. Lenders always evaluate your debt-to-income ratio. A larger mortgage payment eats up a bigger chunk of your monthly income. A lender may not feel comfortable allowing you to go over a certain amount of debt for an auto loan or personal loan.
When to consider a 30-year mortgage
Now let’s talk about when a 30-year mortgage could be a better fit for you when buying a home.
If you can’t afford 15-year mortgage payments
In some cases, you might just not be able to handle the monthly payment that comes with a 15-year mortgage — and that’s ok! Avoid putting yourself in a financially precarious situation.
If you are prioritizing other financial goals
We all have goals that require money in life, and homeownership is often just one of them. You might prioritize retirement savings, kids’ future college expenses, or simply building a big emergency savings fund.
A 30-year mortgage can help you expedite other financial goals, especially if you qualify for a low rate.
Pros and cons of a 30-year mortgage
- You’ll have a lower monthly payment. This gives you more room in your budget to save up for other things or handle a financial emergency.
- You could opt for a more expensive house. Spreading out your mortgage could allow you to borrow more than you would be able to afford with just a 15-year mortgage.
- You could also have an easier time qualifying for other types of loans. A 30-year mortgage will lower your monthly debt-to-income ratio.
- You can shorten the repayment period by making extra principal payments. This strategy reduces the amount of time left on your mortgage. Adding an extra principal-only mortgage payment each quarter or year can substantially reduce the amount of interest you’ll pay over time.
- You might not prioritize extra principal payments. While many homeowners think they’ll make those extra payments to reduce their total interest, it’s easy to forget or choose to spend that money elsewhere. As a result, it’s quite likely you’ll end up paying that extra interest over the years.
- You’ll still be paying off your mortgage when you’re older. If you buy your home when you’re 30 years old, you’ll be making payments until you’re 60. With a 15-year home loan, you’d be mortgage-free by the time you turn 45.
- It takes longer to build home equity. Home loans are amortized, which means your earlier payments are front-loaded to be interest-heavy. Only a small portion actually goes towards your principal until later years.
If you’re not sure which type of mortgage is the best for you, don’t be afraid to shop around. You can learn how to do that by reading our article: How To Choose The Best Mortgage For You.
Picking your mortgage term is a big decision, but it’s best to think about it as an opportunity to choose your priorities in life.
Both 15-year and 30-year mortgages can help you achieve your financial goals, just in different ways. Think about your big financial picture to help you make the best choice for your unique situation.