The Great Debate: 30-Year Mortgage vs. 15-Year Mortgage

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Among the many personal finance debates, the 30-year versus 15-year mortgage is always high on the list. In one corner you have the interest savers who swear by the 15-year mortgage (think Dave Ramsey), and in the other corner you have the lower payment folks who swear by the flexibility of a 30-year mortgage.

We’re in our second home, and in both we financed with a 30-year mortgage, so we’ve preferred the lower payments over the potential interest savings. But the truth is that there is no one “answer” to the 30-year versus 15-year mortgage debate. What works best for one homeowner may not work best for another.

Let’s take a look at a mortgage example so we can see some real numbers, and then we’ll look at the factors one should consider when choosing a home loan.

30-year versus 15-year mortgage

We’ll use as an example a $100,000 home loan. With a 30-year loan at an interest rate of 5.36%, the monthly principal and interest payment would be $559. Over the course of 30 years, the buyer would end up paying a total of $101,254 in interest. On the other hand, the same house mortgaged with a 15-year loan at an interest rate of 4.89% would feature a higher monthly payment of $789. Over the course of 15 years, the buyer would pay interest totaling just 41.314.

The interest rates used were taken from Bankrate.com. Of course, interest rates change daily, but the same pattern holds. A 15-year mortgage results in substantially less total money paid because of the lower interest rate and shorter amortization. A 30-year mortgage results in significantly lower monthly payments, but high total interest paid. Note that you can check out current rates on our mortgage rate page (updated hourly).

So which is best, a 15-year mortgage or a 30-year mortgage?

How to Choose the Right Mortgage

Here are the critical factors to consider when choosing a mortgage to suit your income and lifestyle:

Interest Rate Spread: Generally, the interest on a 15-year mortgage will be less than the interest rate on a 30-year mortgage. The difference, referred to as an interest rate spread, varies. In fact, sometimes the difference in rates is minimal (say less than .1%) as was the case recently, and sometimes the spread can be 1% or more. The difference also fluctuates depending on the size of the loan (conforming versus jumbo).

The wider this spread, the more the interest rates favor a 15-year mortgage. When the interest rates are nearly identical, the numbers favor a 30-year mortgage.

Monthly Income: Every home buyer should carefully examine their monthly income and expenses to determine how much they can afford to reserve for a mortgage payment. Income should be calculated conservatively. For example, an individual who works in an occupation such as construction or oil drilling may enjoy a great deal of overtime pay, especially during the summer months. However, when it comes to making a commitment to a mortgage payment, overtime pay should not be factored into the budget. That extra income might not always be available.

Instead, the typical 40-hour work week should be used to determine how much one can afford to pay each month. Any additional overtime hours or extra bonuses should be set aside in savings to cover emergency situations or other financial responsibilities. This approach might mean that the monthly payment associated with a 30-year loan might be more practical in some cases.

As a general rule, it’s ideal to keep your total mortgage payment under 30% of your income. Banks will approve loans at a higher percentage, but the payments get really uncomfortable, especially when the exceed about 35% of income. Over time as your income increases (hopefully!), the percentage will go done. We’ve found that once the payment gets below about 20% of income, you start to enjoy a certain level of financial flexibility in your monthly budget.

Monthly Expenses: The mortgage certainly isn’t the only housing expense that a home buyer needs to cover. Other home related expenses may include homeowner’s association fees, mortgage insurance, homeowner’s insurance, and property taxes. All of these should be factored into your mortgage payment when assessing your ability to make the monthly payments.

In addition, most folks have other loan payments as well, such as car payments, credit card debt, and school loans. As a general rule, banks want to see total loan payments (mortgage plus all other loans) at 36% or less of monthly gross income. The 36% rule is a reasonable guide. Of course, the lower payments of a 30-year mortgage will make it easier to hit this mark for many.

Spending Habits: If you obtained a 30-year mortgage instead of a 15-year note, what would you do with the extra money you’d save each month from the lower mortgage payment? It may be easy to say you’d save it, and maybe you would, but this is an important question to answer honestly. For those that would save and invest this money, the relative difference between a 30-year mortgage and a 15-year mortgage fade away.

In some ways, you can think of a 15-year mortgage as a forced savings vehicle. By requiring the higher payment each month, a 15-year loan is in effect forcing the home owner to “save” the extra money by paying it against the loan. If you have the discipline to save and invest on your own, however, you may prefer to put that extra money in the stock market, other real estate investments, or even a bank CD.

Flexibility: Because of its lower monthly payments, a 30-year loan gives a home owner the flexibility to make lower monthly payments or pay extra and retire the loan early. This is the primary reason we’ve always opted for a 30-year mortgage. But again, the above factors (interest rate spread, monthly income, savings habits) to dictate one option over the other for you. But for us, the flexibility was just too great to pass up.

The Bottom Line

The bottom line when it comes to home mortgages is that each situation is unique, and a number of factors can influence the decision between 30-year and 15-year mortgages. If you’d like to compare the different options, Bankrate offers a helpful 30-year versus 15-year mortgage calculator.

So what’s your take? Which is better, a 30-year or 15-year mortgage?

Current Mortgage Rates

Published or Updated: April 6, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. sekishin says:

    2001 (1st home purchase): 80/20 piggyback, the 80% was a 30yr @ ~7.5%
    2005 (refinance): we had paid off the 20 of the 80/20 and refi’d what remained of the 80 part to a 15yr@5.375%; the payment difference between a comparable 30yr was about $200/mo. (the total of the 80/20 payments was a tad under the new 15yr payment – so we figured we could handle it)

    Glad we did the 15yr refi, but could not have afforded a 15yr in 2001 – now we are only 10-11 years away from 100% equity, moving along . . .

  2. Manshu says:

    I guess age and job security are the other things to consider. If you don’t have a secure job, then a lower monthly payment is better than a higher one.

  3. Len Penzo says:

    Everybody is different, but to me flexibility is key. I recently went from a 20-year back to a 30-year mortgage to get the lowest possible payment in case I lost my job. For me it was an easy decision: why box myself in and limit my options by choosing the shorter-term loan when I can offset much of the additional interest payments of the longer loan by simply making extra payments?

    As long as I remain gainfully employed I will faithfully make enough extra payments to continue my goal for having the mortgage paid off within the next eight years or so. And if I ever do get laid off, my current $600 per month payment is low enough that I can be unemployed a long long long time without ever having to worry about defaulting on my loan.

    Heck, I can make that payment working most anywhere!

    My $0.02 (after taxes)

    Len
    Len Penzo dot Com

  4. Dave says:

    Having held at least four mortgages covering two homes these past 20 years, the only proper answer is “carry the mortgage you can realistically pay off the soonest.” When you buy your first house, cash flow is usually tight so a 30 year mortgage would be advised. As you make more money, a 15-year mortgage may help you pay your home off faster. In my case, I started with a 30-year mortgage at 11.5% (back in the early 1980s when that was a pretty good interest rate!), refinanced at an 8% 15-year mortgage later and paid it off in seven years by doubling the principal. My wife found a nicer home and we took out a 15-year mortgage and, again, paid it off in seven years by doubling the principal. In all of those cases, we could afford to both pay the mortgage payment and double the principal each month to cut the loan in half. In all of my cases, our salaries grew making our mortgage payment a smaller percentage of our income. We decided to get rid of the mortgage (even though it amounted to 15% of our income) because I could think of hundreds of better uses for my money than paying “rent” to the bank!

  5. Tim says:

    I have a 15 year loan with a 30-year amortization and 15-year balloon. I make double payments every month and I’m always about a payment ahead (in case I forget to make a payment). This gives me the flex to go back and forth on the amount I pay (e.g. lose job), but I’ve always made double payments. For those of you that don’t know what a double payment is, it’s a payment that has the full interest+principal added onto another payment that is the next scheduled payment’s principal. That allows me to skip every other interest payment on the 30-year amortization schedule and pays off the loan in 15 years.

  6. Roy says:

    In all of the times I have refinanced I have never seen the 15 vs 30 year spread at more than 1/2% and most of the time it is closer to 1/4%. Nothing prevents you from paying off a 30-year mortgage in 15 years or less, but you also have the freedom to not pay any additional principal anytime something happens to make money tight. I think it is good planning to not buy a house that costs more than you can afford to pay off in 15-years or less, but financing for 30-years gives you payment flexibility for extra financial breathing room if and when you need it.

  7. Strick says:

    Like the pay down debt vs. build savings debates, I don’t think this matters much. Cutting a dollar from spending that can then be used to Either pay down debt or build savings is the significant action.

    For this problem, the key is to not buy too much house that will absorb too much of your overall lifetime income and prevent other things from being affordable (from travel to retirement). If you need a 30 year to be able to “afford” the payments (or, worse yet, to qualify), then I agree with Roy that the house is too expensive. But the benefits of a 15-year vs. 30-year seems mostly a wash to me.

    Focus on savings & net worth, not cash flow. (If cash flow is a problem, then its your spending thats the problem, not your financing choice).

  8. 2Tony says:

    As a Certified Financial Planner, I typically advise my clients against 15 year mortgages. Whether it is over 15 years or 30, do you think you can find an investment that will provide an average annual return greater than 4.5%? (This is a ballpark average “net” cost of your mortgage, when considering the tax-deduction of the interest expense). The opportunity cost may be earning an 8% return with the additional payments you’re making (not to mention the flexibilty of your payments, or ability to repay your loan with devalued dollars, as we experience inflation). If your goal is to pay the house off early, save those add’l payments, and with the arbirtage you earn, you might be able to pay it off in 12 years instead.

  9. Affacturage says:

    Let’s face it: despite many people’s protestations to the contrary, too many folks have an automatic trust of government. When there is a problem, many of us don’t like to think of government as the problem but as the solution. Add to that the near phobia that many have about economics as business and what do we get? Pretty much what we have now: a government going billions of dollars IN debt in attempts to get the economy OUT of debt, We get a government doing such idiotic things as bailing out companies for whom bankruptcy is imminent and buying up banks.

  10. Wes Bridel says:

    Thanks for the article. You hit on a key point without going into much detail on “Spending Habits”. For most people, having a 15yr Mortgage is probably better because they would otherwise spend the difference and have nothing to show for it. However, for those with discipline and the desire to steward their money well, I haven’t found a client yet who didn’t see that a 30yr fixed mortgage was better than a shorter one. We’ll go into this in much more detail on the Kingdom Calling Blog, but let me throw out a couple quick points.

    As you mentioned, if you invest the money wisely that you saved each month w/ the 30 yr Mortgage. you should easily outperform the money saved in the shorter mortgage. If your goal is to own your home free and clear, you would be able to pay it off in 10-14 years depending on how you invested it.

    The fact that we can get such amazingly low long term interest rates (which are tax deductible) right now is astounding. there’s a very strong chance that we will be entering a period of much higher interest rates and inflation in the coming years. If this is the case, one way to counteract the government’s foolishness is to take the banks money locked in at this low rate and put yours to work somewhere else where the value of your dollars are not deteriorating.

  11. ira kellman says:

    The spread between a 15 and 30 isn’t as big as it looks because the 30 carries a much higher percentage of tax deductility

  12. David McCoy says:

    As stated before a 30 year is much better and if one will make an extra payment now and then you will be surprised at how fast you will be able to pay off the debt. The banks are counting on you not doing that because most everyone finds if difficult to disipline themselves and they make the money.

  13. Howard says:

    FINANCIALLY, no question a 15 year is better as long as you can make the payments. The benefit of the 30 year is you can afford more home & arguably a “better” lifestyle.

    The other benefit of the 15 year that I believe was missed above is the 2nd 15 years where you would have been putting toward your mortgage you can now invest/save 100%.

  14. Audrey says:

    My take on the question is neither the 15 year or the 30 year repayment mortgage would be right for me. This is because my mortgages are all Buy to Let loans. The tenants pay rent which covers all the interest payments to the bank plus I get paid a cashflow on top. I actually EARN MONEY from ‘my’ houses and I never even own them! With time their capital value increases. Even in the credit crunch their capital value is worth more than the loans on them. Eventually if I need to realise the cash I will sell them, pay back the loans and have a good pot of money to retire on after taxes have been paid. The money I invested to purchase them is minimal and is creating wealth over time. I can take equity out to buy another one should capital values increase enough to do so. To me that is a no brainer.

  15. Randy says:

    One thing that helped me decide on the 30 yr is that I know I had plans to invest more in upgrades to the house and property, so, the extra cash was useful. In the end, I’ll probably break even by getting a higher price if/when I sell, and, live in a nicer house than I bought.

  16. MSG says:

    I always go for 30-year mortgage. If you want, you can double up and pay off in 15 years, but it’s your call, not the banks. Secondly, the interest allows other tax write-offs, so the effective interest is lowered. And it’s cheap money – easy to make more than the effective 4 to 5 % interest rate in many investments.

  17. matt says:

    MSG,
    If you double your payment on a 30 year loan, it won’t be payed off in 15 years. It will take about 6 years.

  18. Roshawn says:

    I have a 30-year loan that I pay as a 15 year. I guess I too have the best of both worlds: interest savings and cash flow flexibility. Thanks for an interesting post.

  19. mike says:

    15 year – no doubt. I had a 30 year mortgage on my first property. Great payments. Only problem? When I went to sell it I had no equity because I had poured so much into interest.
    My current condo has a 15 year mortgage.
    Going into the buying process, I committed myself to that. My budget was based on a 15 year mortgage, not 30 and let’s see if we want 15, I knew 15 all along.
    The result?
    I bought a house I can AFFORD. And now, I’m blogging about how to become mortgage free by age 30.
    Can you imagine the opportunities you’d have with no mortgage?
    Get trapped in a 30 year mortgage and you will find ways to spend the money you could be saving.
    Just my .02 everyone…

  20. Michael says:

    If you double the payments (meaning actually pay two times the normal principle + interest amount each month) the 30 year loan will take 11 years to pay off, not 6.

    That’s still pretty darn good.

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