February 16, 20247-minute read
Author: Hanna Kielar
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If you’re new to the world of buying real estate, you’ll quickly discover that you have lots of choices when it comes to selecting the right lender, as well as selecting the right loan. One particular option you’ll need to weigh before buying a home is whether a 15-year or 30-year mortgage makes the most sense for you. There are several factors you'll need to consider when you decide how long you want to spend paying off your mortgage. It may seem as if your decision should be based strictly on getting the best interest rate and lowest monthly payment, but there are other factors to consider – like your lifestyle, income and budget – that affect your financial future.
15-Year Vs. 30-Year Mortgages: What’s The Difference?
America's most popular mortgage is the 30-year fixed-rate mortgage, but it’s not your only option. A popular alternative to the 30-year fixed is the 15-year fixed-rate mortgage. People with a 15-year term pay more per month than those with a 30-year term. In exchange, they are given a lower interest rate. This means that borrowers with a 15-year term pay their debt in half the time and possibly save thousands of dollars over the life of their mortgage. In addition to fixed-rate mortgages, borrowers may also want to consider adjustable-rate mortgages, which are popular for their low introductory rates, particularly if they don’t plan on living in the home for long.
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Mortgage Comparison: 15- Vs. 30-Year Mortgage Example
Let’s assume you want to buy a $300,000 home and you have a 20% down payment, so that we don’t have to factor in the cost of private mortgage insurance (PMI). So you get a mortgage for $240,000. For the sake of simplicity, we’ll assume it’s a 4% interest rate for both (even though, in reality, you would likely get a lower rate for a 15-year loan). Here’s the difference in your mortgage payments and costs:
Mortgage Term | Monthly Mortgage Payment | Total Cost Of Mortgage Interest | Total Cost Of Mortgage |
30-year fixed | $ 1,145.80 | $172,486.82 | $412,486.82 |
15-year fixed | $ 1,775.25 | $79,545.18 | $319,545.18 |
So, you can see that, in this example, having a 15-year mortgage would mean paying just over $600 more per month. However, this could save you close to $100,000 over the length of the loan.
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A Deeper Look: 15- Vs. 30-Year Mortgages In Action
It may seem like the answer is right in front of you: A 15-year mortgage means you spend less time making payments. Better yet, you’ll devote less of your hard-earned money to interest over time. Though a 15-year mortgage might make the most sense on paper, a decision between the two term lengths depends on your individual situation. You’ll need to evaluate your personal finances and understand your ability to keep up with payments. Let’s take a look at the benefits of both mortgage terms.
Pros And Cons Of 15-Year Mortgages
As with all things, there are both benefits and drawbacks to having a 15-year mortgage term. A major benefit of going with a 15-year mortgage is that you’ll own your home in 15 years. You’ll be free of mortgage payments after that. Many people look forward to being debt-free sooner. If that sounds like you, a 15-year mortgage may be the way to go. Another advantage of a 15-year mortgage is all the money you’ll save on interest. Lenders charge a lower interest rate for 15-year loans because it’s easier to make predictions about repayment over a 15-year horizon than it is over a 30-year horizon. Another reason for the savings? Home buyers are borrowing the money for half the time, which dramatically reduces the cost of borrowing. With a 15-year mortgage, you also build equity in your home faster. Home equity is the portion of your property that you truly own. It’s the difference between what your home is worth and what’s left on the loan. When you pay off your mortgage at double speed, you build up equity at a quicker pace. That means you’ll be able to refinance your mortgage quicker if better rates become available, you need cash to undertake renovations or you want to buy an investment property. Life happens, and sometimes, it happens quickly. Before you commit to a higher monthly mortgage payment, take an honest look at your monthly budget and consider your lifestyle. You don’t want to end up house poor, meaning all your money goes into your house, leaving you with little left over for other expenses. Since a 15-year mortgage requires you to make larger monthly payments, lenders want to be sure that you have the ability to repay the loan. Because of this, a 15-year mortgage could be harder to qualify for than a 30-year mortgage.Pro: You’ll Own Your Home In 15 Years
Pro: You’ll Save Thousands Of Dollars
Pro: You’ll Build Home Equity Faster
Con: Your Monthly Mortgage Payment Will Be Much Higher
Con: A 15-Year Mortgage Could Be Harder To Qualify For
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Pros And Cons Of 30-Year Mortgages
Now that we’ve examined the pros and cons of a 15-year mortgage, let’s do the same for a 30-year home loan. The 30-year mortgage has consistently been the favorite among homeowners for its low monthly payment. Though more of your money goes to interest and you pay for twice the length of time compared to a 15-year term, the advantages of a lower monthly payment can’t be ignored. Budgets tend to fluctuate for many families. The costs of education, clothes, food, utilities and a need to save and invest can all vary each month. A lower mortgage payment means you can put more away for retirement, college funds and home repairs. A 30-year mortgage could allow you to afford more physical property than a 15-year mortgage. If you need a bigger mortgage to buy a larger home, taking 30 years to pay it off would give you the freedom to make this purchase. It might not be possible if you only had 15 years to pay off the loan. By their nature, a longer-term loan means more time spent paying interest. Combined with the long repayment term, interest rate charges are higher on a 30-year mortgage than a 15-year one. This means you’ll end up paying more over the life of the loan than you would for a 15-year mortgage with the same interest rate. Pro: Lower Monthly Payments
Pro: You Could Buy A Bigger House
Con: Higher Interest Payments
Options For Paying Off Your 30-Year Mortgage Early
Not sure if you can consistently afford the higher payments of a 15-year mortgage, but would like to enjoy the savings? As long as your mortgage doesn’t have a prepayment penalty, you can make extra payments directly on the principal when your budget allows. Prepayment penalties are written into your mortgage agreement. If your mortgage has a prepayment penalty, you’ll pay fees if you pay your principal balance off earlier than you agreed to. Some lenders charge prepayment penalties, but others don’t, so be sure to ask about this when you’re choosing a lender for your mortgage. The great thing about making additional payments is that you can be flexible. Consider putting extra amounts – say a company bonus or a modest inheritance – toward your mortgage principal to pay off your debt earlier. Even smaller amounts can make a big difference. Set aside a jar to collect any unexpected money or savings you’re able to achieve and dedicate it to making extra payments on your mortgage each month. Be sure to let your mortgage servicer know that you want the extra payment to be applied to your principal. Another method is to make biweekly mortgage payments instead of making one payment each month. This tends to line up with the payroll schedule for many workers, and equates to 13 yearly payments, so you'll be making an extra payment each year. Not all mortgage servicers offer this option. Check with your mortgage servicing company to see if they offer biweekly payments. Just because you’re not able to commit to a 15-year mortgage right now doesn’t mean you can’t refinance later on. Let’s say that right now, a 30-year fixed monthly mortgage payment feels more comfortable for you. Fast-forward 5 years, and you’ve gotten a big promotion at work and a generous bump in salary. Now you might want to consider refinancing to a 15-year term mortgage. In the end, you’ll have paid your mortgage off in 20 years and enjoyed some of the savings you would have had if you’d chosen the 15-year term, but without the financial stress of struggling to make each month’s payment. If you have a larger amount of money that you’d like to apply to your mortgage and would like to reduce your monthly payment, consider a mortgage recast. With a recast, your lender accepts your payment and reamortizes your loan to adjust your monthly payments.Make Extra Payments
Make Biweekly Payments
Refinance Your Mortgage
Consider A Mortgage Recast
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The Bottom Line On Choosing A 15- Vs. 30-Year Mortgage
When it comes to mortgage terms, 15-year mortgages are perfect for those with the income to make the higher monthly payments. But just because you’re not ready to commit to a 15-year mortgage now doesn’t mean you can’t enjoy the benefits that come with paying your mortgage off earlier. Ready to apply? Start your mortgage application online today with Rocket Mortgage®.
