When buying a home, one of the most important financial decisions is choosing the length of your mortgage. The factors in this decision will differ from person to person, but the two most common options to choose from are the 15-year mortgage and the 30-year mortgage. Lenders typically offer these as fixed-rate loans, meaning that borrowers keep the same payment throughout the life of the loan.
Both options allow you to finance a home, but they differ in monthly payments, total interest paid, and the speed at which you build equity in the property. Understanding these differences can help you make an informed decision based on your financial goals and circumstances.
Differences Between 15-Year and 30-Year Mortgages
The most apparent difference between a 15-year mortgage and a 30-year mortgage is how long the mortgage takes to pay off in full. However, the difference between these two terms of the loan impacts several details:
Monthly Payment
The monthly payment on a 15-year mortgage is generally much higher than on a 30-year mortgage because the loan is being repaid in half the time. This also means a homeowner will own their home free-and-clear much faster.
The longer repayment period spreads the monthly payment on a 30-year mortgage, making it lower. This makes homeownership more affordable when considering the mortgage’s impact on your monthly budget, but it also means you’ll pay more in interest over the life of the loan.
Interest Rate
Lenders typically offer lower interest rates on 15-year fixed-rate mortgages compared to 30-year fixed-rate mortgages. Lenders face less risk when borrowers pay back a loan in a shorter amount of time, so they often offer a better rate.
Total Interest Paid
In addition to any differences between the interest rates offered on each type, a homeowner with a 15-year mortgage pays significantly less interest over the life of the loan because the balance goes down more quickly, and the loan is paid off completely in half the time. Even if there were no difference in the interest rates offered, with a 15-year mortgage a homeowner pays significantly less interest over the life of the loan. This is one of the most attractive benefits of a 15-year term.
Over a 30-year term, a homeowner pays more in interest because a lower monthly payment spread over a longer period means the loan balance comes down more slowly. Even if a 15-year mortgage and a 30-year mortgage have the same interest rates, borrowers pay more interest over a longer period with a 30-year loan.
Building Equity
Equity is the difference between what your home is worth and the amount of money that is still owed on it. The length or “term” of your loan greatly impacts how quickly you build up equity.
Although a 15-year loan requires a higher monthly payment, borrowers pay more “principal” (the balance of the loan) every month. As a result, payments on a 15-year mortgage result in paying down your balance and building up equity in your home more quickly.
Equity builds more slowly in the early years of a 30-year mortgage, as a larger portion of your monthly payment goes toward interest, especially in the first half of the term.
Pros and Cons of 15-Year Mortgages
The Pros
Lower Total Interest – Between a shorter loan term, a balance that is paid down more quickly, and typically a lower interest rate, homeowners pay thousands and thousands less in interest over the life of the loan.
Building Equity Faster – Paying down your loan in less time also builds equity faster. This provides more flexibility and options for homeowners in the future, especially when selling the home or refinancing in the future.
Lower Interest Rates – 15-year fixed-rate mortgages typically come with lower interest rates than 30-year fixed-rate mortgages, further reducing the total cost of borrowing.
The Cons
Higher Monthly Payments – The biggest downside to a 15-year mortgage is the higher monthly payment. With limited income or more additional financial commitments a 15-year mortgage may be harder to qualify for, or it could cause greater strain.
Less Flexibility – Committing to a higher payment can reduce your financial flexibility. If unexpected expenses arise, such as medical bills or job loss, you may find it more difficult to keep up with the larger payments, and you cannot reduce the payment. Some borrowers that want to balance paying off their loan faster but remain flexible elect for a longer loan term and make additional payments or larger payments than required when possible.
Pros and Cons of 30-Year Mortgages
The Pros
Lower Monthly Payments – The primary benefit of a 30-year mortgage is the lower monthly payment. This makes homeownership more affordable and provides greater flexibility in your budget.
Increased Cash Flow – Lower monthly payments free up money for other financial goals, such as saving for retirement, investing, or paying down high-interest debt. With lower payments, borrowers also have more room to absorb financial setbacks or take on other expenses with less worry about making timely mortgage payments.
The Cons
Higher Total Interest – Homeowners will pay significantly more interest over the life of the loan compared to a 15-year mortgage. The total interest paid can often exceed the original loan amount if paid over 30 years.
Building Equity Slowly – With lower payments, you’re paying off the principal more slowly, meaning it will take longer to build equity in your home. Especially in the first half of the term, homeowners pay down the mortgage balance more slowly, so those looking to sell their home within a few years do not build equity as efficiently.
Interest Rate – Interest rates on 30-year loans are typically higher, which means more money goes toward interest, especially in the early years of the loan when the balance stays high for a longer period due to the smaller payments.
Example Comparison of Monthly Payments and Total Cost
To illustrate how the balance between monthly payment and total cost works between 15-year and 30-year fixed-rate mortgages, let’s consider a scenario where a homeowner wants to buy a $400,000 home and plans to make a down payment of 20%, or $80,000.
The homeowner is deciding if their mortgage for the remaining $320,000 should be a 15-year or 30-year fixed rate mortgage. Lenders typically offer a lower interest rate for a 15-year loan, so this illustration assumes an example of 6.5% for the 30-year mortgage and 6% for the 15-year mortgage.
Option 1: 30-Year Mortgage for $320,000 with 6.5% Fixed Rate
- Monthly payment: $2,022.62
- Total of 360 monthly payments: $728,142.36
- Cost of total interest: $408,142.36
Option 2: 15-Year Mortgage for $320,000 with 6% Fixed Rate
- Monthly payment: $2,700.34
- Total of 180 monthly payments: $486,061.53
- Cost of total interest: $166,061.53
Between the two, the 30-year option has a much lower monthly payment making it a more affordable option, but paying the balance down more slowly means far more of the payments are going to interest. The 15-year option requires a higher monthly payment, but it pays down the balance much more quickly, and less of the payment goes toward interest. You pay off the loan in half the time, with significantly lower cost.
Who Benefits Most from a 15-Year or 30-Year Mortgage?
These two options may each be appropriate for borrowers with different goals and situations. Although not a comprehensive list, here are some scenarios that may fit well with a specific option:
15-Year Mortgage
Borrowers with Higher Income: If you can comfortably afford a higher monthly payment, a 15-year mortgage can help you save money on interest and pay off your home faster.
Financially Disciplined Borrowers: Those who are good at budgeting and planning for the long-term benefits of building equity quickly may prefer the 15-year option.
Retirement savers who near retirement and want to ensure they pay off their mortgage before retiring may find that a 15-year mortgage aligns with their goals.
30-Year Mortgage
First-Time Homebuyers – Many first-time buyers prefer the lower monthly payments, making a 30-year mortgage more manageable in terms of monthly budget.
Borrowers with Less Financial Flexibility: If you expect future changes in your income or have other financial priorities, a 30-year mortgage offers more flexibility.
Long-Term Homeowners: If you plan to stay in the home for a long period, a 30-year mortgage provides the comfort of lower payments, even though you'll pay more in interest.
Paying Off Your Mortgage
Borrowers who are concerned about committing to a shorter term but want to pay off their home loan faster may have options to reduce their balance. There are multiple ways this can be done:
Making Extra Payments: Making even a small additional payment each month can significantly cut down your term and the total interest paid. For example, adding $100 to your monthly payments can help shorten a 30-year mortgage by several years. Another common strategy is to make an additional payment once a year toward the principal.
Biweekly Payments: Instead of making monthly payments, some homeowners make half of a monthly payment every two weeks. This results in 26 half payments, or 13 months’ payments. That one extra full payment each year reduces the loan term and saves interest.
Reallocating Lump Sums: Putting bonuses, tax returns, or profits from sale of another asset toward the principal can help pay off your mortgage early.
It is important to speak with your lender to understand the implications of these and to better understand exactly how it will impact your loan.
How Do I Decide Between a 15-Year Mortgage and a 30-Year Mortgage?
Choosing between a 15-year and a 30-year mortgage is a significant decision that depends on your financial situation and long-term goals. I recommend that you speak with a trusted mortgage lender, such as Union Home Mortgage, to discuss your goals and evaluate the options available to you.
The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above.
