Fixed-rate mortgages are the simplest and most popular home loans. They prevent the surprises that can come with adjustable-rate mortgages when your interest rate is subject to increase down the road. But you still have a choice to make: Should you take out that fixed rate mortgage for 15 years or for 30 years?
A 15-year mortgage minimizes your total borrowing costs and lets you pay off your mortgage in half the time. However, a 30-year loan has lower monthly payments, and that can free up some of your money to save for other goals or to pay for unanticipated expenses.
- The length, or term, of a fixed-rate loan is generally 15 years or 30 years.
- A 15-year mortgage means you'll pay off your debt more quickly, but a 30-year loan offers lower payments.
- Consider factors such as the amount of interest, your financial goals, and how soon you can realistically repay the loan when you're making your decision.
What's the Difference Between a 15-Year and a 30-Year Mortgage?
|15-Year Mortgages||30-Year Mortgages|
|The principal amount you borrow is repaid in just 180 months, so your monthly payments will be higher.||The principal amount you borrow is stretched out over 360 months, so your monthly payments will be less.|
|You'll be mortgage-free after 15 years.||You'll be paying on your mortgage for 30 years.|
|You'll pay less interest over the life of the mortgage.||You'll pay more interest over the life of your loan.|
The most noticeable difference between a 15-year mortgage and a 30-year loan is the required monthly payment. Your monthly payment will be less with a 30-year loan, because you'll be dividing your borrowed principal balance over more time.
The higher monthly payments associated with a 15-year mortgage might not be affordable for you, however. It depends on your monthly income and on how much of a down payment you're able to make. You can run the numbers yourself using our mortgage calculator.
Which Is Right for You?
It might be appealing to stretch your payments out over 30 years if you're concerned about your monthly cash flow, and you might not be approved for a 15-year mortgage in any event. Lenders approve your loan application based in part on your ability to repay it. They compare your monthly income to your monthly debt payments. This is your debt-to-income ratio, and it might disqualify you for a 15-year loan.
You'll get a lower interest rate and pay less interest overall over the life of the loan.
You'll build equity in your property more quickly.
Your mortgage is less likely to be underwater if you're forced to sell.
Your monthly payments will be higher because you're squeezing all that principal into a shorter term.
Making higher mortgage payments might prevent you from saving for things like retirement or emergencies.
You'll be at risk of default and foreclosure if life throws you a curveball that prevents you from meeting your higher monthly payments, such as a job loss or illness.
The graph below illustrates the difference in principal and interest rates in 15-year and 30-year mortgages.
Other, less-noticeable differences are also significant.
Consider Your Other Goals
A 30-year mortgage makes it easier to save for retirement. You’ll have more free money in your budget to put toward long-term goals instead of making a hefty mortgage payment every month. However, you might not be better off with a 30-year loan if you spend that extra money on “wants” and luxuries each month instead,
You'll Have Some Flexibility
A 30-year loan helps you keep your options open and absorb life’s surprises. You’ll probably be grateful for that lower monthly payment if you lose your job or if another unexpected event occurs that affects your income.
How Soon Can You Repay Your Loan?
A 15-year mortgage helps you pay down your loan balance quickly. You’ll make a bigger dent in your debt with each monthly payment you make than you would over 30 years. You’ll owe less money at any given point in time, which offers several benefits.
You'll build equity more quickly, which you can use for your next home purchase or for other needs. It’s also easier to refinance when you have a lower loan-to-value ratio. And you’re less likely to find yourself "underwater," owing more on your home than its fair market value, if you find that you have to sell your property for some reason.
The Effect of Interest Costs
You'll pay less interest with a 15-year mortgage than you would on a 30-year mortgage. Fifteen-year loans typically come with lower interest rates than 30-year mortgages, so you’ll pay less interest right from the beginning. The longer you borrow, the more interest you'll pay overall. Your loan balance—the amount that you're paying interest on—will remain higher for a longer period of time.
Look at an amortization calculator that shows monthly payments, monthly interest charges, and your running loan balance to see how the process works.
Suppose you borrow $200,000 to buy a home:
- You can take a 30-year fixed-rate loan with a rate of 4.10%
- You can take a 15-year fixed-rate loan with a rate of 3.43%
The 30-year loan would have a lower monthly payment:
- Your 30-year monthly payment: $966
- Your 15-year monthly payment: $1,432
You’ll pay down the balance sooner with a 15-year loan:
- Remaining loan balance on the 30-year loan after seven years: $172,513
- Remaining loan balance on the 15-year loan after seven years: $119,674
You’ll pay less interest with a 15-year loan:
- You’ll pay $147,903 in interest costs over the life of your loan with the 30-year option.
- You'll pay only $56,122 in total interest costs with a 15-year mortgage.
You can take out a 30-year loan and pay extra each month if committing to the higher 15-year payment is too intimidating. Calculate your payments as if you have a 15-year mortgage, then make that higher payment unless and until an emergency prevents you from doing so. You should also check your mortgage contract to make sure that is allowed without penalty.
This strategy will get you out of debt sooner, and you’ll pay less interest than you would if you were to stretch payments out over the full 30 years.
The Bottom Line
Commit to the 15-year mortgage so that you get the lowest possible rate from the start if you want to spend the absolute least on financing your home. Go with the 30-year option if you have any reason at all to be concerned about cash flow over the course of three decades.