15 vs. 30 year mortgage

15 Vs. 30 Year Mortgage: What You Should Get

8/31/2020

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:

Your monthly payments for a 30-year mortgage can be less
A 15-year mortgage costs you less in the long run - and lets you pay off your home in half the time

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:

The principal balance of your loan - money that goes toward lowering the actual loan amount
The interest on your loan - money that you are paying to the institution that gave you the loan

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.

30-Year Mortgages

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.

The Pros:
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.

The Cons:
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.

15-Year Mortgages

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:

The Pros:
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.

The Cons:
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.