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

Should you get a 30-year mortgage or a 15-year mortgage? Here we go over the pros and cons of each so you can make an informed decision.

15 vs 30 year mortgage

Shopping for a new home can be fun. You get to drive around town, checking out different homes, and deciding what will work best for you. Shopping around for a mortgage? Slightly less fun.

But, still, it’s what you need to do if you want to make sure you’re getting the best possible deal on your mortgage. The shopping-around process comes with lots of different choices. You’ll need to choose a lender, decide on your down payment amount, and choose whether or not to buy points. But one of the biggest choices you’ll make is on your mortgage term.

The term is how long you’ll pay on the mortgage if you don’t make any extra payments. While lenders offer loads of different terms, the most common are still the old stand-bys: 15 year and 30 year.

Some home-buyers (or those looking to refinance) see the interest on a 15-year mortgage and assume that’s the way to go. After all, who wouldn’t want to make payment on their mortgage for 15 years less?

But then they see the higher mortgage payment, and think, “Wait, maybe this isn’t what I want to do.”

Actually, both options have pros and cons. Let’s lay them out here. Then we’ll talk about some situations in which each option might be appropriate.

Pros and Cons of 30-Year Mortgages

The federal government standardized the 30-year mortgage during the Great Depression. The idea was that borrowers would pay off their mortgage before retirement when their earning potential disappeared.

These mortgages are still the norm for the majority of home buyers. However, they’ve always had some disadvantages. And those disadvantages have increased as housing has become proportionately more expensive, and as homeowners have stopped staying in a single home for more than 30 years.

Advantages of 30-Year Mortgages 

  1. It’s safe and predictable

The primary reason 30-year mortgages are popular is that they’re safe and predictable for home buyers. When you’re paying off your home over 30 years, you’ll generally have a lower payment. This makes it easier to ride waves of economic turmoil, job loss, medical issues, and other unexpected financial issues without putting your home at risk.

  1. It ties up less of your budget

Depending on the size of your mortgage and the interest rate difference, a 30-year mortgage could cost significantly less per month than a 15-year option. This plays into the first advantage of a 30-year mortgage. They’re cheaper per month, making it easier for you to lower your payment.

  1. You may be able to borrow more

Your debt-to-income ratio is one of the major factors lenders use when determining how much to lend you. This means how much you pay in debt each month versus how much income you bring in. Since a 30-year mortgage payment is relatively smaller, you have more wiggle room and can likely afford a larger mortgage. This can get you into a larger, nicer home or a home in a more expensive area.

  1. Investors can work it to their advantage

Mortgage interest rates are still pretty low these days. Say you get a 5% mortgage interest rate but could earn an average of 8% through investing. You can invest the money you save each month by locking in a lower mortgage payment. Over time, you could easily out-earn the additional interest you’re paying on your mortgage.

  1. You can always pay it off more quickly

With the additional budget flexibility of a 30-year mortgage, you can always decide to make extra payments. If you come into some extra money or get a raise, put the money towards your mortgage payments. You’ll pay it down more quickly, and pay much less interest over time. But if you don’t have extra cash, you’re not locked into that higher payment amount.

Disadvantages of 30-Year Mortgages

  1. Interest rates are higher

Longer mortgage terms are a relatively higher risk for lenders. That means they’ll charge higher interest on a 30-year mortgage versus a 15-year mortgage. Sometimes the difference is significant.

As of this writing in August 2017, I could get a 30-year mortgage on a $100,000 mortgage for about 4.288% with a decent credit rating. A 15-year mortgage would cost more like 3.555%. That doesn’t seem like a big difference, but later we’ll look at exactly what that means.

For current rates, check out this table:

  1. It costs a lot of interest over time

Again, we’re going to do the math on this in some examples below. But know that the higher interest rate stretched over a payment period that’s twice as long means 30-year mortgages cost a lot in interest. It’s not unusual to pay twice as much as the original principal amount by the time your mortgage term is over.

  1. You’re stuck with mortgage payments for longer

Even if you make extra payments on your 30-year mortgage, you probably won’t pay it off 15 years early. So you’ll be stuck making those minimum mortgage payments for up to twice as long. If you’re less than 30 years from retirement, this could pose a serious problem!

  1. You’re more likely to pay additional fees

Again, remember that 30-year mortgages are riskier for investors. Many are government-backed to give lenders some additional peace of mind. Because of this additional risk and need for more backing, these loans often come with additional fees, either up front or paid on a monthly basis. That can eat into some of the monthly payment difference between a 15-year and a 30-year mortgage.

  1. It takes much longer to build equity

With a 30-year mortgage, it’ll take much longer for your loan principal to decrease. Smaller payments and a higher interest rate mean less of your payment goes towards principal each month. This can be especially problematic if you plan to sell the house in the near future, as it’ll take you longer to make a profit on the home. Depending on your down payment amount, this may also mean that you pay private mortgage insurance (PMI) for much longer.

Pros and Cons of 15-Year Mortgages

Although most consumers still opt for a 30-year mortgage, the 15-year option is popular among the financially savvy. This may be especially true if you live in an area with more affordable housing options. When you aren’t spending a fortune on housing, you can more easily afford to take advantage of a shorter mortgage term.

Wondering what’s so great about a 15-year mortgage? Or why in the world someone wouldn’t take advantage of this option? Here are its pros and cons:

Advantages of 15-Year Mortgages

  1. They have a lower interest rate

As I mentioned in the example above, 15-year mortgage rates are lower than 30-year rates. The difference may not seem like much. But we’ll look in a moment at how just a percentage point can make a huge impact over time.

  1. You’ll save a lot of interest over time

This one is kind of a no-brainer, but it still needs to be said. Because a 15-year mortgage has lower interest to begin with and gets paid down more quickly, you’ll save a load of interest. This is, of course, if you only make the minimum payments over time. Again, examples are coming soon.

  1. You’ll pay down your principal more quickly

Since you’re paying less in interest and making larger payments, you’ll build up equity in your home a lot more quickly. This can be helpful if you’ve started off with a low down payment. You can build up 80 percent equity and get rid of those pesky PMI payments much more quickly. Building equity more quickly is especially helpful if you’re planning to move in the next few years.

  1. You’ll be mortgage-free 15 years or more sooner

Obviously, there’s something to be said for becoming mortgage-free sooner, even without making extra payments. Sure, maybe you don’t save quite as much for retirement while you’re paying down your mortgage. That does mean you’ll miss out on a few years’ worth of compounding interest payments. However, you could easily be mortgage-free decades before retirement, which is a huge advantage.

Disadvantages of 15-Year Mortgages

  1. They’ll tie up more of your monthly budget

With their higher payment, 15-year mortgages can be relatively riskier. In the event of financial instability, you may find it more difficult to pay your mortgage. And even when you are financially stable, the mortgage payment will take more money that you could devote to other items, like saving, investing, or paying down higher-interest debt.

 
  1. So you’ll have less left over for saving or investing

If you’re otherwise in good shape with debt, the primary disadvantage of a bigger mortgage payment is that you won’t have as much to invest. As we noted earlier, with interest rates so low, investing extra cash may be a better move than paying off your mortgage more quickly.

  1. You’ll likely have to buy a less-expensive home

Since your payments will be higher, you’ll be locked out of more expensive mortgage options. This means you’ll either need to bring a larger down payment to the table, or you’ll wind up in a less-expensive home.

Examples of Interest Over Time and Amortization

The points above can largely seem abstract until you see them in action. So let’s look at how the differences in payments, interest amounts, and amortization work over time with 15- and 30-year mortgages.

Note: For purposes of this example, we’re using estimated interest rates from our mortgage rates calculator. These examples are for a consumer with a 700-719 credit rate and are current as of August 16, 2017. Your situation may vary.

Payment Differences

First, let’s look at just how big a difference there is in payments between these two options. We’ll use two scenarios throughout this section, just to keep things consistent. One is for a $150,000 mortgage, and the other is for a $300,000 mortgage.

On a $150,000 mortgage, you the example home buyer could expect to pay around 3.808% interest on a 30-year mortgage. This leads to a $913 per month payment (not including property taxes or insurance). On a 15-year mortgage, the buyer would pay 3.486% interest with a $1,054 per month payment.

That’s a payment difference of just $141 per month.

The differences are amplified on a larger mortgage, though. On the $300,000 mortgage, the home buyer could expect to pay 4.408% interest on a 30-year mortgage. That’s a $1,607 payment. On a 15-year mortgage, the interest drops to 3.422%, but the payment skyrockets to $2,108.

That’s a payment difference of $501 per month.

Differences in Interest Over Time

Not only do the payments differ between these two options, but the total interest you’ll pay over time also differs dramatically. Here’s what you can expect on these four loan options if you make only minimum payments, using this calculator:

Mortgage Term Original Principal Interest Rate Total Interest
30 Years $150,000 3.81% $101,924
15 Years $150,000 3.49% $42,885
30 Years $300,000 4.41% $224,459
15 Years $300,000 3.42% $83,918

Differences in Amortization 

Amortization is how a loan gets paid off on a set repayment schedule with a fixed interest rate. As your loan amortizes, you’ll build up equity in your home. That means that you own a larger percentage of your home, compared with what the bank “owns” through your mortgage.

In each of these examples, we’ll assume that you put 10 percent down on your home, meaning you start out with 10 percent equity. We’ll use the exact mortgage and interest amounts from the examples above. We’ll check in on the loan’s principal balance after one, three, five, and ten years. Check out the table below for the results, which are from this calculator*:

Mortgage Term Original Principal Balance at One Year Balance at Three Years Balance at Five Years Balance at Ten Years
30 Years $150,000 $146,101 $140,220 $133,890 $115,756
15 Years $150,000 $138,944 $122,377 $104,614 $54,392
30 Years $300,000 $292,969 $282,266 $270,578 $236,433
15 Years $300,000 $277,773 $244,506 $208,888 $108,433

*Note: We removed PMI, property tax, HOA, and homeowners insurance fees from the calculation, just for simplification purposes. 

A Few Scenarios

Now that you’ve seen how these scenarios play out, you probably have a better idea of which mortgage option would be best for your needs. But let’s look at a few specific situations, as well, that might affect your ultimate decision.

Lots of Other Debt

If you have a lot of other debt, you’ll already be constrained in your ability to get a mortgage. As I mentioned above, lenders look at your total minimum monthly debt payments versus your total income. If that ratio is too high–usually above 30 percent, including the new mortgage payment–you may be out of luck for a loan.

But in some cases, it does make sense to buy even while you’re trying to pay off other debts. For instance, if home ownership is significantly cheaper than renting in your area, buying might put you on better financial footing.

However, you’re going to need the smallest possible mortgage payment. In this case, you’re likely better off finding the cheapest home that will work for you. Get a smaller mortgage, and finance the home for 30 years.

Use the money you’ll have saved to pay down your higher-interest debts. Then, you can consider either making extra payments or refinancing to a 15-year mortgage once you’re out of debt. This is especially beneficial as mortgage interest rates stay low.

Plans to Move in the Near Future

If you think you’ll move in the next three to five years, buying a home may not be the best option to begin with. But maybe it does turn out to be a good choice in your situation.

However, if you want to make money on your home when you move in a short period, you’ll need to do one of three things:

  1. Put down a larger down payment. A bigger down payment means you start out with more equity in your home. This makes it more unlikely you’ll be underwater when you sell in a few years.
  2. Take out a shorter-term mortgage. As you saw in the example below, you’ll build equity in your home significantly more quickly with a 15-year mortgage. This can make it much easier to get back out of the home within three to five years without losing money.
  3. Buy in a rising-value area. This is a riskier proposition and one that depends partly on chance. But if you buy a home in an area where home values are increasing rapidly, you could have more equity in your home either way. This isn’t because of paying down your mortgage alone, but because the home could be worth much more when you decide to sell.

A Larger Mortgage Amount

As you can see, the 30-year versus 15-year mortgage differences are amplified by a larger starting principal. If you have a larger mortgage, you’ll need to do the math carefully. And this situation is less cut-and-dry.

That extra $500 per month is a lot, and you could invest it to out-earn the additional interest you’ll pay on a longer mortgage term. But the quicker equity build-up on this loan could also be hugely beneficial, depending on your circumstances.

Here, the most important factor is likely what mortgage you can afford. If you can easily afford the 15-year mortgage payment, even if you run into financial difficulties, you might decide to go for it. Or maybe you split the difference. Take the smaller payment on the 30-year mortgage. Then split the $500 you’ve saved between investing and paying down your mortgage a bit more quickly.

Settling in For the Long-Term

What if you’re likely to settle into this home for the next ten years or more? In this case, it’s more a matter of preferences.

You have time to build up equity, so you might opt for a 30-year mortgage and save or invest the difference. Or maybe this smaller payment just gives you budget flexibility. You can always make extra mortgage payments when you have the money, but won’t lock yourself into the higher payment rate.

On the flip side, owning your home free and clear in 15 years is an attractive idea. This can be especially true if you’re planning to stay in the home until you retire or even into retirement. Just be sure you can handle the larger payment amount, come what may.

The Bottom Line

As with all things personal finance, this is a very personal question. Neither option is inherently better than the other. The best you can do is determine what your mortgage options are, and use the calculators linked above to run the numbers for your scenario. Then, you’ll be equipped with the knowledge you need to make this important home buying decision.


Topics: Mortgages

20 Responses to “The Great Debate: 30-Year Mortgage vs. 15-Year Mortgage”

  1. sekishin

    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 [email protected]%; 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. 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

  3. 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!

  4. 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.

  5. 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.

  6. Strick

    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).

  7. 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.

  8. 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.

  9. 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.

  10. David McCoy

    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.

  11. Howard

    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%.

  12. Audrey

    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.

  13. 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.

  14. 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.

  15. 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…

  16. 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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