If you’re shopping for a home, it’s important to consider the pros and cons of a 15-year versus a 30-year mortgage. A 30-year home loan offers more affordable monthly payments, but a 15-year loan could substantially reduce the interest you pay overall.
There are other important considerations. With spread-out payments, a 30-year term could help you afford a costlier property, whereas a 15-year term can help you build equity on a faster timetable.
Continue reading to learn more about these two options and determine which is the best choice for your situation.
15-year and 30-year mortgage differences
When you apply for a mortgage, you select the payback period, or the loan repayment term. Commonly, homebuyers decide on a 15-year or 30-year term and repay the debt in equal monthly installments.
What is a 15-year mortgage?
A 15-year mortgage is a home loan you repay over 15 years, or 180 monthly installments.
Because you’re paying the loan off over a shorter period, your monthly payments are higher than with a 30-year loan. However, because you pay for less time, the total cost of the loan is significantly lower than if you spread repayment over 30 years.
What is a 30-year mortgage?
With a 30-year mortgage, you make 360 monthly payments.
Because you’re paying a smaller portion of the amount you borrowed (or principal) each month, your monthly payments are lower than with a 15-year loan. However, since you pay interest for twice as long, the total paid will be much higher than with a 15-year loan.
15-year vs. 30-year cost: What’s the difference?
The cost difference between a 15-year and 30-year mortgage varies depending on the size of the loan and the interest rate.
Here is an example of a 15-year versus a 30-year mortgage for a $320,000 loan with a 7.12% APR, the national average in September 2023, according to the St. Louis Federal Reserve. (For comparison’s sake, we’re just using one mortgage rate, but keep in mind that 15-year mortgages usually enjoy a lower APR. We’re also not including escrow payments for property taxes, mortgage insurance and homeowners insurance.)
| Mortgage term | Monthly payment | Total interest paid | Total paid |
|---|---|---|---|
15 years | $2,897.76 | $201,597.08 | $521,597.08 |
30 years | $2,154.82 | $455,735 | $775,735 |
With a 15-year mortgage, you’d save a staggering $254,000 compared to a 30-year mortgage with the same interest rate. However, your monthly payment would be $743 higher with the shorter-term loan.
Pros and cons of 15-year mortgages
| Pros | Cons |
|---|---|
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The primary benefit of a 15-year mortgage is the long-term savings. In our example above, you’d save more than a quarter of a million dollars by choosing the shorter loan term.
The interest rate on a 15-year mortgage is also typically lower than what mortgage lenders are charging for a 30-year mortgage. That’s because lending money for a longer time carries more risk, and higher interest rates cover the lenders in case repayment goes awry.
In August 2023, the average interest rate on a 15-year mortgage was about 0.75 percentage points lower than a 30-year mortgage. So, if we reduce the 15-year mortgage rate in our example by 0.75 percentage points (to 6.37%) the monthly payment would go down to $2,765 and total interest paid would be $177,651, resulting in even greater long-term savings versus the 30-year loan.
You also build up equity in your home faster with a 15-year mortgage. Equity is the difference between the home’s appraised value and how much you owe on it. Long-term, you can use that equity for a cash-out refinance or home equity loan (or line of credit), or to ditch mortgage insurance payments.
“A 15-year note almost immediately starts to pay down principal balance whereas a 30-year mortgage spends almost the first 10 years paying interest with barely any of the principal being touched,” said Misty Garza, a CFP and vice president of financial planning firm Bogart Wealth.
The biggest drawback to a 15-year mortgage is the higher monthly payment, which means you have less money available to save for financial goals such as retirement or a child’s college education.
The higher payment can also limit how much house you can afford. With the lower payments of a 30-year loan, you could qualify for a more expensive house.
Pros and cons of a 30-year mortgage
| Pros | Cons |
|---|---|
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The biggest advantage of a 30-year mortgage is that it makes buying a home more affordable. With the lower payments, you can qualify for a bigger loan, allowing you to buy a more expensive home that might better serve your family’s needs.
Another benefit of smaller monthly mortgage payments is that you have more money available to save, invest or spend. Alternatively, you could use that extra money to pay off your home loan early, allowing you to save on total interest paid.
One disadvantage to a 30-year loan is that your equity grows slowly. If you sell the home when you have little equity, you’ll have to use most of the sales proceeds to repay the lender.
Finally, a 30-year mortgage costs more because it has a higher interest rate than a 15-year loan, and the total interest paid will be much higher.
Is a 15-year or 30-year mortgage right for me?
The answer to the 15-year versus 30-year question depends on your personal situation. Your cash flow is an important consideration, Garza said. For example, if you have a variable income — perhaps you’re self-employed — you might decide it’s unwise to lock in a higher monthly payment.
If your income is more static and you plan to keep the home forever, Garza suggested a 15-year mortgage to limit the total interest you pay.
If you don’t have a lot of savings to cover emergencies (such as large medical bills), however, a 30-year term is the “better alternative,” said Sean Casterline, a chartered financial advisor and wealth manager at Delta Capital Management. The lower payments allow you to build savings to cover emergencies.
| Scenario | Best option |
|---|---|
You prioritize long-term savings over short-term breathing room in your budget | 15 years |
You crave flexibility in your budget, even at the long-term cost of accruing interest | 30 years |
You aim to build equity quickly | 15 years |
You’re seeking to buy a higher-cost home | 30 years |
You want a lower monthly payment so you have more funds to invest | 30 years |
Alternatives to 15-year and 30-year mortgages
While 15- and 30-year mortgages are the most common, some lenders offer mortgages for other terms, such as 10 years or 20 years. The advantages and disadvantages are similar to 15- and 30-year loans. The longer you pay off your home loan, the more you pay in interest and the lower your monthly payments will be.
There’s another alternative that gives you flexibility in paying off your mortgage and allows you to save money: Take out a 30-year mortgage and make additional payments to retire the principal early. You could pay a set amount (beyond your minimum payment) each month, or simply send money when your budget allows.
“Essentially, you’re paying a bit more in interest, but you will still pay off the mortgage in a shorter time frame with more financial flexibility,” Casterline said.
Frequently asked questions (FAQs)
Use a mortgage refinancing calculator (such as Fannie Mae’s) to see how much money refinancing would save over the life of the loan compared to what you’d pay with your existing loan. Account for closing costs (about 2% to 6% of your refinanced loan amount) in your savings estimate.
Make extra payments marked “apply to principal” to pay your loan off early. Leverage windfalls, such as annual tax refunds or employment bonuses, as lump-sum payments, too.
The rate on a 15-year mortgage is generally lower than on a 30-year mortgage. The average APR on a 15-year term was about 0.75 percentage points lower than that on a 30-year term, as of August 2023.
The longer the duration, the lower the monthly payments because you’re spreading repayment over a longer period.
If you itemize your deductions, you can deduct mortgage interest for home loans up to $750,000 no matter the loan duration, depending on when you took out the loan. When you pay more interest, you get a higher tax deduction. Consult a certified financial adviser to see if the tax deduction is worth paying more interest.
