Is a 15-Year Better Than a 30-Year Mortgage?

Business woman calculating
•••

 krisanapong detraphiphat/Moment/Getty Images

Confused by all of the choices you need to make when buying a home? Fixed-rate mortgages are the simplest and most popular home loans, and they prevent surprises that might come with adjustable-rate mortgages. But you still need to choose between a 15-year mortgage and a 30-year mortgage, work with the right lender, and manage your costs.

15-Year vs. 30-Year Mortgages

A 15-year mortgage minimizes your total borrowing costs and allows you to eliminate debt quickly. But a 30-year loan has lower monthly payments, allowing you to save for other goals and pay unexpected expenses.

Can’t Decide?

We’ll cover the pros and cons in detail below. But if the 15-year payment is too intimidating, you can get a 30-year loan and pay extra every month. Just calculate your payments as if you have a 15-year mortgage, and make that higher payment until an emergency prevents you from doing so. That strategy gets you out of debt sooner, and you’ll pay less interest than you would on a 30-year mortgage. However, if you want to spend the absolute minimum on interest, commit to the 15-year mortgage so that you get the lowest rate possible.

Monthly Payment

At first glance, the most noticeable difference between 15-year and 30-year loans is the required monthly payment. 30-year loans feature a lower payment—although that doesn’t necessarily make them better. Other, less noticeable, differences are also significant.

Affordable Payments

Depending on your income and the size of your down payment, a 15-year mortgage might not be affordable.

  1. If you’re concerned about your monthly cash flow, it may be appealing to stretch out your payments over 30 years instead of 15.
  2. Lenders approve your loan application based, in part, on your ability to repay the loan. To do so, 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 those loans.

Other Goals

If you’re saving for other goals, like retirement, a 30-year mortgage makes it easier to fund those goals. Instead of making a hefty mortgage payment every month, you’ll have more free money in your budget to put toward those long-term goals. Of course, if you go with a 30-year loan and you just spend the money on “wants” every month, you might be better off with a 15-year loan.

Flexibility

A 30-year loan helps you keep your options open and absorb life’s surprises. If you change jobs (or lose a job), you’ll appreciate that lower monthly payment.

Payment Calculations

To see the mechanics behind your monthly mortgage payment, learn the basics of payment calculations and use free online calculators to try different payment options.

How Fast You Repay

A 15-year mortgage helps you pay down your loan balance quickly. With each monthly payment, you’ll make a bigger dent in your debt than you would with a 30-year loan. At any given point, you’ll owe less money, which offers several benefits:

  1. You build equity more quickly, which you can use for your next home purchase or other needs.
  2. It’s easier to refinance with a lower loan-to-value ratio.
  3. If you need to sell your home, you’re less likely to be underwater.

Plus, if you stay in your home, you can stop making mortgage payments after 15 years instead of letting them linger for 30 years.

Interest Costs

With a 15-year mortgage, you pay less interest than you would on a 30-year mortgage. Two factors work in your favor:

  1. Interest Rate
    15-year loans typically have lower interest rates than 30-year loans, all other things being equal. So you’ll pay less interest starting in your first year.
  2. Lifetime Interest Costs
    The longer you borrow, the more interest you pay. Plus, with the smaller monthly payment on a 30-year loan, your loan balance (and the amount you pay interest on) remains higher for longer. To see how that process works, look at an amortization table showing monthly payments, monthly interest charges, and your running loan balance.

    Example: 15-Year vs. 30-Year Comparison

    To see how all of the factors above work together, let’s go through an example.

    Assume you borrow $200,000 to buy a home, and you can choose between a 15-year and 30-year mortgage.

    • Assume a 30-year fixed-rate loan with a rate of 4.10 percent.
    • Assume a 15-year fixed-rate loan with a rate of 3.43 percent.

    Monthly Payment
    The 30-year loan has a lower monthly payment.

    • 30-year payment: $966
    • 15-year payment: $1,432

    Debt Reduction
    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

    Interest Costs
    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. Also, you’ll have to pay off the $200,000 loan balance.
    • With the 15-year loan, you will pay only $56,122 in total interest costs.