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Home buying is a huge expense. And unless you have substantial savings or are selling one home to pay for the next, you’ll likely need a home loan to fund the purchase. This loan will probably take many years to pay off.
When you apply for a mortgage, you often have a choice of loan terms. The traditional option is a 30-year term, which would be repaid over three decades. However, it’s also possible to get a 15-year mortgage—and doing so could provide ample benefits.
If you’re not sure whether a 15-year or 30-year mortgage is right for your financial situation, this guide can help you decide.
In this guide:
- Should I choose a 15- or 30-year mortgage?
- Don’t forget about the opportunity cost
- Talk to a financial advisor
Should I choose a 15-year or 30-year mortgage?
The main difference between a 30-year and 15-year mortgage is clear: The 15-year loan will be paid off in half the time.
But it’s important to understand all the implications of your mortgage choice, and the decision isn’t one to take lightly. It will affect your finances for years.
The 30-year mortgage: good for the long haul
There’s a reason 30-year mortgage terms are the most common for home buyers in America: Homes are expensive, and it is difficult to afford paying for one over a shorter term.
When you take out a 30-year loan, you have three full decades to pay back what you’ve borrowed (plus interest), so your monthly mortgage payments are lower than with a shorter-term mortgage.
Because your payments must be below a certain percentage of your income to qualify for a mortgage, low monthly payments make it easier to actually qualify for a loan.
Unfortunately, low monthly payments come at a price. You’ll accrue more interest over that long period, making your loan more expensive. Interest rates on a 30-year mortgage are also usually higher than 15-year mortgage rates.
Despite the higher rate, this option is good for you if you wouldn’t qualify for a 15-year mortgage in the first place, or if you want to keep your monthly housing payments low so you can do other things with your income, such as investing it.
Pros of 30-year mortgages
- Lower monthly payments than with a shorter loan.
- It’s easier to qualify for the loan because of lower monthly payments.
- You’ll have more flexibility in your monthly budget—you could make extra payments on your loan, invest it, or do other things with your money.
Cons of 30-year mortgages
- You will pay more total interest over the life of the loan than with a shorter loan term.
- Your interest rate will be higher than it would be for a 15-year mortgage.
- You’ll be in debt for twice as long.
The 15-year mortgage: good for your bottom line
If you opt for a 15-year mortgage instead of a 30-year mortgage, you’re on track to own your home free and clear in half the time. This is a major benefit. You’ll also likely get a lower interest rate and pay significantly less in interest over time.
Unfortunately, monthly payments will be much higher, so much of your money will be tied up in housing costs. And it will be more difficult to qualify for the loan, as lending banks might fear you won’t be able to afford to keep up with the higher payments.
But if your income is high enough to qualify and you want to be debt-free ASAP, this option could be ideal for you.
Pros of 15-year mortgages
- You’ll likely qualify for a lower interest rate than you’d pay on a 30-year mortgage.
- Your total interest costs will be lower over the life of the loan, both because of the shorter repayment period and because of the lower interest rate.
- You will be able to pay off your loan in half the time as with a longer mortgage, so you’ll be debt free and won’t have to worry about owing the bank.
Cons of 15-year mortgages
- It’s much harder to qualify for a 15-year mortgage because of the increased debt-to-income ratio requirements.
- Your monthly payments will be much higher, so you won’t have as much cash for other purposes while you’re paying down your loan.
30-year vs 15-year mortgage: by the numbers
The table below shows the difference between a 15- and 30-year mortgage with example rates and loan amounts.
|15-year mortgage||30-year mortgage|
|Mortgage loan balance||$250,000||$250,000|
|Total cost of the mortgage||$316,201||$425,533|
Your own payment amounts and interest rates will vary, but you can plug your actual figures into our mortgage calculator to get a better idea of which loan term would work better for you.
Don’t forget about the opportunity cost
Assuming you’re able to afford the monthly payments on a 15-year mortgage, choosing this loan would seem to make sense, because your home will cost you much less over time than with a longer-term mortgage.
But, because you only have a finite amount of cash flow (i.e. money available) each month, you need to consider the opportunity costs. If you’re committing to a larger monthly mortgage payment, you’ll have less money to do other things.
Consider your other financial obligations and what you have to give up to make that larger mortgage payment. For example:
- Do you have other kinds of debt, such as high-interest credit card debt? If so, this will cost you more in interest than any mortgage loan would. You might be better off choosing a 30-year versus a 15-year loan so you have more money to devote to debt payoff.
- Are you behind on retirement savings? Devoting more money to retirement and less to paying off a mortgage may make sense. Even the higher interest rate on a 30-year mortgage is likely to be below the rate of return you could get by investing in the stock market.
- Do you have to send kids to college? Saving for their college fund could be a better use of the extra money than devoting it to a 15-year loan.
Talk to a financial advisor
As you can see, there are both pros and cons to a 30-year mortgage versus a 15-year mortgage. And this decision is a big one, because it will affect you for years.
A financial advisor can examine your total financial situation and help you choose the right term.
Gather prequalified rates from a few of the best mortgage lenders and ask your advisor which option they think is right for you.
Author: Christy Rakoczy