Hello again, home buyers! While there are a ton of different kinds of mortgages out there, most buyers end up weighing the pros and cons of the 15 vs. 30 year mortgage. For starters, the biggest advantages for each are:
The difference between these two loans goes far beyond how many years you’ll be making payments, so let’s dive in!
Mortgage Term Loan Basics
To clarify, when we are talking about 15 vs. 30 year mortgage loans, we are referring to fixed-rate mortgages, not adjustable-rate mortgages (ARMs). With a fixed-rate mortgage, the monthly payment and the interest rate are fixed for the entire term of the loan. Your monthly payment pays for two things:
If you have an ARM, the interest fluctuates after a period of time, which can have adverse consequences for how much you’re paying. We recommend going with fixed-rate mortgages - especially for first-time home buyers. Because these loans are fixed, more of your payment will go toward your principal balance over time.
For example, if you have a 30-year mortgage for $300,000 at 4.5% interest, your monthly payment will be approximately $1520. Here are what a few key points to show you what the payment allocation will look like:
You’ll notice that - no matter where you are in your loan - when you add the interest and principal columns, they will always come out to $1,520. However, there are plenty of other aspects of this table to analyze, so we’ll continue to refer back to it throughout this post.
These mortgages are overwhelmingly the most popular choice. In fact, 90% of home-buying mortgages are 30 years and there are plenty of great reasons why.
First off, a 30-year mortgage allows for a lower monthly payment, which allows for people to save more and set other goals. This mortgage type also helps you buy more home than you’d be able to with a shorter term loan.
This loan also provides a great point of entry into the world of home buying. Once you have a home, build up savings, and make more money, you can refinance when lower interest rates are available or move to a shorter term loan - which almost always comes with a lower interest rate.
That said, these loans aren’t always ideal.
When you looked at that table, were you surprised by the $247,220 of interest. Not cute, is it? With a 30-year loan, you will pay more total interest over time - and your interest rate will be higher because the mortgage lender is assuming a higher risk.
While 15-year mortgages are less sought after, we strongly recommend them for those who can afford them. First off, let’s look at that same loan table, but if it was a 15-year instead of a 30-year loan. When doing so, the monthly payment jumps from $1,520 to $2,295 - which is a significant increase, but the long term savings is worth it:
For a 15-year mortgage, you will save $134,124 that would otherwise go towards interest. That’s nearly ½ of the initial loan! Not only are you paying off this loan in half the time, you’re also paying a lot less for it overall.
One more pro - if you were offered a 4.5% interest rate for a 30-year mortgage, is extremely likely that your 15-year interest rate would be less. Here’s what that same table would look like if you are paying 3.5% interest instead of 4.5%.
Monthly payment: $2,144.65 - $150.35 less than for a 15-year at 4.5%:
At this rate, you’re saving $161,183 when compared to a 30-year loan at 4.5%. That’s more than ½ of the initial loan.
Of course, a 15-year mortgage has its cons, too.
Your monthly payment is going to be higher. You might save $161,183 in the long run, but for 15 years you’ll be paying $624.65 more a month than with a 30-year loan. This money can go used towards something else, like a vacation fund, renovations, paying off other bills, or investments.
15 vs. 30 year mortgage: Nothing’s Set in Stone
Just because you initially choose a 15 or 30 year mortgage doesn’t mean that you can’t change it later. You can refinance and to get a lower interest rate and change how many years are going on your mortgage. For first-time home buyers, we often suggest starting with a 30-year mortgage and then refinancing and switching to a 15-year mortgage when the time is right.
However, everyone and every situation is different, so talk to your lender or financial advisor to figure out what’s best for you. If you need help, we can help point you in the right direction.