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Comparing 15- vs. 30-Year Mortgages

Published on: March 12, 2022

15 vs 30 year mortgage

When taking out a new home loan, compare your options on a 15- vs. 30-year mortgage term to find the best choice for you. Depending on which loan you choose, your monthly payment and interest rate may change.

So, which is better? Here’s a look at what a 15-year vs. 30-year mortgage offers, tips to compare the two, and how to decide which best suits your needs.

What’s the difference between a 15- vs. 30-year mortgage?

The biggest difference between a 15- and 30-year mortgage is simply how long you have to repay the debt: With a 30-year loan, you’ll have 30 years to make payments on your new home. With a 15-year loan, you’ll have half the time.

As a result, your monthly payments are higher with a 15-year mortgage than they would be with a 30-year loan on the same home. Put into numbers: A $360,000 repayment would cost you $1,000 per month over 360 months (30 years), while that same $360,000 repayment would cost you $2,000 per month over 180 months (15 years).

This doesn’t tell the whole story, though. You can expect a significant difference in interest rates when comparing 15-year vs. 30-year fixed loans.

Typically, your 15-year mortgage interest rate will be lower than any interest rate offered on a 30-year loan from the same lender. While that shorter loan period may mean a higher monthly payment, a lower interest rate means you pay less interest over the life of your home loan.

So you will spend less on your new home than if you stretched out your repayment for a longer period at a higher APR. If you want to figure out just how much you will save — and what you can afford monthly — consider trying out a 15- vs 30-year mortgage calculator.

When should you get a 15-year fixed-rate loan?

A few benefits to note when considering a 15-year fixed-rate mortgage:

  • Pay less interest. Shorter loan periods typically have lower interest rates.
  • Get out of debt sooner. Less debt means you can focus your financial efforts elsewhere.
  • Build home equity faster. Paying down more principal early on allows you to own more of your home’s value, which is important if you want to sell, refinance, or take out a home equity loan on the property.

With that said, most borrowers don’t choose a 15-year mortgage, opting instead for a longer term of up to 30 years. In fact, according to recent data from Freddie Mac, about 90% of homebuyers who take out a mortgage choose a 30-year note, while only 6% opt for the shorter 15-year term.

Why is that? Well, there are downsides to keep in mind when comparing mortgage options, especially if you’re considering a 15-year loan period.

  • Monthly payments will be higher. Since you’re repaying your home over a shorter period of time, your monthly payments will be higher with a 15-year term versus a 30-year term.
  • You may not be able to afford as much house. With higher monthly payments, you may limit your potential home options when choosing a shorter mortgage term, whereas a longer loan might allow you to spend a bit more.
  • Your financial flexibility could be impacted. While you could always pay extra toward your 30-year mortgage, if you have extra cash available, you can’t shortchange your 15-year mortgage’s monthly payment when money is tight.

A 15-year mortgage term is ideal for borrowers who want to get out of debt faster and can afford to put a bit more toward their monthly mortgage payment. It may also be better suited for borrowers with steady, reliable income; if your income fluctuates or is uncertain, opting for a lower payment (and then making additional payments as you can) could be the better choice.

Spend some time with a 30- versus 15-year loan calculator to determine what you can afford and how much you’ll save.

When should you get a 30-year fixed-rate loan?

Most homebuyers choose 30-year fixed-rate mortgages. And honestly, it’s pretty easy to see why:

  • Monthly payments are lower. Because buyers are stretching their repayment over a longer period of time, monthly minimums are naturally lower.
  • Buyers can afford “more home.” Borrowers may be able to afford a bigger or more expensive property, which might not have been possible with a shorter loan term and higher monthly payments.
  • Homeowners can always prepay. While loans and lender terms vary, most 30-year mortgages offer the flexibility of loan prepayment without penalty. This means if an owner has the funds to throw at their mortgage balance, they can pay it off earlier than scheduled (and save on interest in the process).

For these reasons, 30-year fixed-rate mortgages tend to make homeownership more accessible for more borrowers, regardless of their monthly budget or down payment amount.

Of course, they also have their weaknesses. For example:

  • 30-year mortgage rates tend to be notably higher than 15-year mortgage rates. This can mean a higher total cost for your home over the length of your loan repayment term.
  • You’ll build equity slower. Lower monthly payments mean less money going toward your principal balance. Less money toward principal means slower gain of home equity. If you plan to sell, refinance, or leverage your home for an equity loan, this could derail your plans.

To determine how much a 30-year mortgage will cost you over the life of your loan term, consider checking out a 30-year loan calculator.

Paying off a 30-year mortgage in 15 years: hybrid solution

Would you rather pay less toward your monthly payment or less in interest over the life of your loan? Luckily, you can choose both: Take out a 30-year mortgage and pay it back in just 15 years. This hybrid approach offers greater payment flexibility than a shorter loan; plus, figuring out how to pay off a 30-year mortgage in 15 years is really simple. You just make a larger payment each month!

If money gets tight, you can always make your usual (lower) loan payment. But if you have the funds, you can make an additional payment toward your loan, along with your scheduled amount.

Of course, paying down your 30-year mortgage in 15 years gets you out of debt sooner. So you build home equity faster and can redirect your monthly funds toward other savings goals. This strategy can save you quite a bit of money in interest over the life of your home mortgage repayment, too.

Let’s say you purchase a $375,000 home and put $75,000 down. Your total financed amount is $300,000. You’re offered a 30-year loan at a rate of 3.125% with a monthly payment of $1,285 or a 15-year loan at 2.75% with a $2,036 monthly payment.

You opt for the 30-year loan, but instead of making $1,285 monthly payments, you contribute $2,036 toward your mortgage each month.

 

30-year fixed-rate loan 15-year fixed-rate loan 30-year loan repaid in 15 years
Initial loan amount $300,000 $300,000 $300,000
Interest rate 3.125% 2.75% 3.125%
Minimum monthly payment $1,285 $2,036 $1,285
Additional monthly payment n/a n/a +$751
Loan repayment term 360 months (30 years) 180 months (15 years) 187 months (15 years, 7 months)
Total amount paid $462,645 $366,456 $378,928
Total interest paid $162,645 $66,456 $78,928

 

By paying off your 30-year mortgage in 15 years with additional monthly payments, you’d save nearly $84,000 in interest while retaining your financial flexibility. If anything happened or an unexpected expense cropped up, you could always stop making additional contributions and return to your original mortgage payment.

In order for this strategy to work, you’ll need to ensure that your loan agreement does not involve any prepayment penalties. Most lenders will allow you to make additional payments or pay off your total balance ahead of schedule. If your lender does not, however, these penalties can eat into any savings your strategy may have recognized.

Should you get a 30-year mortgage and refinance to a 15-year later?

Another home loan option is to take out a 30-year mortgage and later refinance into a 15-year mortgage. Many homebuyers go this route, which allows them to take advantage of better rates when the market dips or when they’ve built up sufficient equity in their home.

With this option, borrowers give themselves options down the line, instead of making a harder (and potentially more burdensome) choice when first buying their home. For buyers who do refinance after paying down their mortgage balance for a few years, the resulting monthly payment can be a pleasant surprise. And if your credit improves or market rates drop, this method lets you optimize your loan even further.

Let’s say you finance that $375,000 home we referenced with a 30-year mortgage. As scheduled, the loan would cost you a total of $462,645. Five years later, however, you refinance into a 15-year loan, allowing you to pay off your home in just 20 total years. Over the course of both loans, you will pay a total of $102,921 in interest.

While you won’t save as much as you would have with an original 15-year loan — or by paying down your 30-year loan in 15 years — you’ll still save money with a refinance. However, the benefits of a refi depend on market trends. If rates go up, refinancing might be unwise.

Choosing between a 15- and 30-year mortgage depends on a variety of factors, including your monthly budget and how long you plan to own your home. Be sure to use a trusted mortgage calculator to help you determine which loan term makes the most sense for you and your next home purchase.

If you’re ready to explore your mortgage options, contact a local Finance of America Mortgage Advisor today.

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