15-Year vs. 30-Year Mortgage: An Overview
Fifteen-year and 30-year mortgages are structurally similar—the main difference is the term. While a 30-year mortgage can make your monthly payments more affordable, a 15-year mortgage generally costs less in the long run.
Most homebuyers choose a 30-year home loan. The 30-year fixed-rate mortgage is practically an American archetype, the apple pie of financial instruments. It is the path that generations of Americans have taken to first-time homeownership.
But many of those buyers might have been better served if they had opted for a 15-year fixed-rate mortgage instead. Though the monthly payments might be higher, they could save thousands in interest.
Key Takeaways
- Most homebuyers choose a 30-year fixed-rate mortgage, but a 15-year mortgage can be a good choice for some.
- A 30-year mortgage can make your monthly payments more affordable.
- While monthly payments on a 15-year mortgage are higher, the cost of the loan is less in the long run.
How MortgageTerms Affect Cost
A mortgage is simply a particular type of term loan—one secured by real property. For a term loan, the borrower pays interest calculated on an annual basis against the outstanding balance of the loan. Both the interest rate and monthly payment are fixed.
Because the monthly payment is fixed, the portion going to pay interest and the portion going to pay principal change over time. In the beginning, because the loan balance is so high, most of the payment is interest. But as the balance gets smaller, the interest share of the payment declines, and the share going to principal increases.
A shorter-term loan means a higher monthly payment, which makes the 15-year mortgage seem less affordable. But the shorter term makes the loan cheaper on several fronts. In fact, over the full life of a loan, a 30-year mortgage will end up costing more than double the 15-year option.
Because15-year loans are less risky for banks than 30-year loans—and because it costs banks less to make shorter-term loans than longer-term loans—a 30-year mortgage typically comes with a higher interest rate.
30-Year Mortgage
In a 30-year mortgage, of course, that balance shrinks much more slowly—effectively, the homebuyer is borrowing the same amount of money for more than twice as long. In fact, it’s more than twice as long rather than just twice as long because, for a 30-year mortgage, the principal balance does not decline as fast as it does for a 15-year loan.
The higher the interest rate, the greater the gap between the two mortgages. When the interest rate is 4%, for example, the borrower actually pays almost 2.2 times more interest to borrow the same amount of principal over 30 years compared with a 15-year loan.
The chief advantage of a 30-year mortgage is the relatively low monthly payment. And even if affordability isn't an issue, there are other advantages:
- The lower payment may allow a borrower to buy more house than they would be able to afford with a 15-year loan since the same monthly payment would allow the borrower to take out a larger loan over 30 years.
- The lower payment allows a borrower to build up savings.
- The lower payment frees up funds for other goals.
Comparison shopping among the best mortgage lenders can help you narrow your options.
15-Year Mortgage
Consumers pay less on a 15-year mortgage—anywhere from a quarter of a percent to a full percent (or point) less, and over the decades that can really add up.
The government-supported agencies that back most mortgages, such as Fannie Mae and Freddie Mac, impose additional fees, called loan-level price adjustments, which make 30-year mortgages more expensive.
These fees typically apply to borrowers with lower credit scores, smaller down payments, or both. The Federal Housing Administration also charges higher mortgage insurance premiums to 30-year borrowers.
Important
Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.
“Some of the loan-level price adjustments that exist on a 30-year do not exist on a 15-year,” says James Morin, senior vice president of retail lending at Norcom Mortgage in Avon, Conn. Most people, according to Morin, roll these costs into their mortgage as part of a higher rate, rather than paying them outright.
Imagine, then, a $300,000 loan, available at 4% for 30 years or at 3.25% for 15 years. The combined effect of the faster amortization and the lower interest rate means that borrowing the money for just 15 years would cost $79,441, compared to $215,609 over 30 years, or nearly two-thirds less.
Of course, there's a catch. The price for saving so much money over the long run is a much higher monthly outlay—the payment on the hypothetical 15-year loan is $2,108, $676 (or about 38%) more than the monthly payment for the 30-year loan ($1,432).
For some experts, being able to afford the higher payment includes having a rainy day fund tucked away. What many financial planners like about the 15-year mortgage is that it is effectively “forced saving” in the form of equity in an asset that normally appreciates (although, like stocks, homes rise and fall in value).
If an investor can afford the higher payment, it is in their interest to go with the shorter loan, especially if they are approaching retirement when they will be dependent on a fixed income.
Special Considerations
There are some instances where a borrower may have the incentive to invest the extra money spent each month on a 15-year mortgage elsewhere, such as in a 529 account for college tuition or in atax-deferred 401(k) plan, especially if the employer matches the borrower’s contributions. When mortgage rates are low, a savvy and disciplined investor could opt for the 30-year loan and place the difference between the 15-year and 30-year payments in higher-yielding securities.
Using the previous example, if a 15-year loan monthly payment was $2,108, and the 30-year loan monthly payment was $1,432, a borrower could invest that $676 difference elsewhere. The back-of-the-envelope calculation is how much (or whether) the return on the outside investment, less the capital gains tax owed, exceeds the interest rate on the mortgage after accounting for the mortgage interest deduction. For someone in the 24% tax bracket, the deduction might reduce the effective mortgage interest rate from, for example, 4% to 3%.
Broadly speaking, the borrower comes out ahead if the investment's returns after taxes are higher than the cost of the mortgage less the interest deduction.
This gambit, however, demands a propensity for risk, according to Shashin Shah, a certified financial planner in Dallas, Texas, because the borrower will have to invest in volatile stocks.
“Currently there are no fixed-income investments that would yield a high enough return to make this work,” says Shah. Rising mortgage rates can make this method even more difficult. The risk might not always pay off if it coincides with the kind of sharp stock market drops that occurred during the downturn of 2020. It also requires the discipline to systematically invest the equivalent of those monthly differentials and the time to focus on the investments, which, he adds, most people lack.
Private mortgage insurance is required by lenders when you put a down payment that's less than 20% of the value of the home.
A Best-of-Both-Worlds Option
Most borrowers evidently also lack—or at least think they lack—the wherewithal to make the higher payments required by a 15-year mortgage.But there is a simple solution to capture much of the savings of the shorter mortgage: Simply make the larger payments of a 15-year schedule on your 30-year mortgage, assuming the mortgage has no prepayment penalty.
A borrower is entitled to direct the extra payments to the principal, and if the payments are consistent, the mortgage will be paid off in 15 years. If times get tight, the borrower can always fall back to the normal, lower payments of the 30-year schedule. However, a borrower accelerating payments will also have their interest subject to the relatively higher 30-year rate when they may have been better off paying the mortgage off in 15 years anyhow at the lower rate offered on the shorter loan.
Which Is Better, a 30-Year Mortgage or a 15-Year Mortgage?
When deciding between a 30-year and a 15-year mortgage, consider your circ*mstances. Do you need the flexibility of smaller payments, such as what you'd get with a 30-year loan? Or are you focused on the bottom line, and the interest savings you could get with a 15-year loan? Can you afford to make bigger monthly payments, or do you need room in your budget for other goals? The better choice is the one that works best with your finances and long-term goals.
Is It Better to Get a 15-Year Mortgage or Make Extra Payments on a 30-Year Mortgage?
Applying extra payments toward your principal can help you pay down a 30-year mortgage faster without being locked in to a 15-year time frame. Run the numbers to decide whether the flexibility will be worth it, since 30-year loans often come with higher interest rates.
Is It Worth It to Switch From a 30-Year Fixed-Rate Mortgage to a 15-Year?
If you already have a 30-year fixed-rate mortgage and are interested in refinancing to a 15-year mortgage, there are a couple key points to keep in mind. First, consider whether your budget can accommodate the higher mortgage payment of a 15-year loan. Then, compare your existing interest rate with the rates you qualify for on a 15-year mortgage. If you can get a lower interest rate, that could save you money. But with a refinance, you also have to consider the costs of the new loan, which could include origination fees, closing costs, and other expenses. If you don't come out ahead after factoring in the new interest rate as well as the costs of the new loan, you might choose to make extra payments on your existing loan instead.
The Bottom Line
The decision between a 30-year or 15-year mortgage is one that will impact your finances for decades to come, so be sure to crunch the numbers before deciding which is best. If your aim is to pay off the mortgage sooner and you can afford higher monthly payments, a 15-year loan might be a better choice. The lower monthly payment of a 30-year loan, on the other hand, may allow you to buy more house or free up funds for other financial goals.
