15-Year Vs. 30-Year Mortgage Comparison

If you’re new to the world of buying real estate, you’ll quickly discover that you have lots of choices when it comes to selecting the right lender and the right home loan. One particular loan option you’ll need to weigh before buying a home is a 15-year versus a 30-year mortgage to decide what makes the most sense for you.

There are several factors you'll need to consider to help decide how long you want to spend paying off your mortgage. You might think your decision should be based strictly on getting the best interest rate and lowest monthly payment, but other factors – like your lifestyle, income and budget – will affect your financial future.

15-Year Vs. 30-Year Mortgages: What’s The Difference?

America's most popular mortgage is the 30-year fixed-rate mortgage, but it’s not your only option.

A popular alternative to the 30-year fixed is the 15-year fixed-rate mortgage. Borrowers with a 15-year term make higher monthly mortgage payments than borrowers with a 30-year repayment term. In exchange for the shorter 15-year term, borrowers receive a lower interest rate. This means that borrowers with a 15-year term pay their debt in half the time and will likely save thousands of dollars over the life of their mortgage.

Mortgage Comparison: 15-Year Fixed Vs. 30-Year Fixed

Let’s assume you want to buy a $300,000 home. Because you’re prepared to make a 20% down payment of $60,000, you don’t have to factor in the cost of private mortgage insurance (PMI), and you get a mortgage for $240,000. For the sake of simplicity, we’ll assume a 6% interest rate for both the 30-year and 15-year mortgage, though you would likely get a lower rate for a 15-year loan.

Here’s the difference in mortgage payments and costs:

In this example, you would pay around $500 more a month with a 15-year mortgage. However, you’d save over $153,000 in total loan cost over the length of the loan.

Deciding Between A 15- And A 30-Year Mortgage

It may seem like the answer is right in front of you. A 15-year mortgage means you spend less time making payments. Better yet, you’ll devote less of your hard-earned money to mortgage interest over time.

While a 15-year mortgage might make the most sense on paper, deciding between the two term lengths will depend on your circumstances. You’ll need to evaluate your personal finances and understand the advantages and disadvantages of 15- and 30-year mortgage terms.

Pros And Cons Of 15-Year Mortgages

As with all mortgage products, a 15-year mortgage offers both benefits and drawbacks.

Pros

You’ll Own Your Home In 15 Years

A major benefit of a 15-year mortgage is owning your home in 15 years. You’ll be free of mortgage payments in just 15 years. Many homeowners look forward to being mortgage-free faster. If that sounds like you, a 15-year mortgage may be the way to go.

You’ll Save Thousands Of Dollars

Another advantage of a 15-year mortgage is all the money you’ll save on interest. Lenders charge a lower interest rate for 15-year loans because it’s easier to make predictions about repayment over a 15-year horizon than a 30-year horizon.

Another reason for the savings? Home buyers are borrowing money for half the time, which dramatically reduces the cost of borrowing.

You’ll Build Home Equity Faster

With a 15-year mortgage, you build equity in your home faster. Home equity is the portion of the value of your home that is not encumbered by a mortgage. It’s the difference between what your home is worth and what’s left on your home loan.

When you pay off your mortgage at double speed, you accelerate your ability to build up equity. That means you can refinance your mortgage quicker if interest rates start to drop, you need cash for renovations or want to buy an investment property.

Cons

Your Monthly Mortgage Payment Will Be Much Higher

Life happens, and sometimes, it happens quickly. Before you commit to a higher monthly mortgage payment, take an honest look at your monthly budget and consider your lifestyle. You don’t want to end up “house poor,” with all your money going into your house, leaving you with little left over for other expenses.

A 15-Year Mortgage Could Be Harder To Qualify For

Since a 15-year mortgage requires larger monthly payments, lenders have stricter requirements to ensure you can repay the loan. So, it may be harder to qualify for a 15-year mortgage than a 30-year mortgage.

Pros And Cons Of 30-Year Mortgages

Now that we’ve examined the pros and cons of a 15-year mortgage, let’s do the same for a 30-year home loan.

Pro: Lower Monthly Payments

The 30-year mortgage has consistently been the favorite among homeowners for its low monthly payment. Though more of your money goes to interest and you pay for twice the length of time compared to a 15-year term, the advantages of a lower monthly payment can’t be ignored.

Budgets tend to fluctuate for many families. The costs of education, clothes, food, utilities and a need to save and invest can all vary each month. A lower mortgage payment means you can put more away for retirement, college funds and home repairs.

Pro: You Could Buy A Bigger House

A 30-year mortgage could allow you to afford more physical property than a 15-year mortgage. If you need a bigger mortgage to buy a larger home, taking 30 years to pay it off would give you the freedom to make this purchase. It might not be possible if you only had 15 years to pay off the loan.

Con: Higher Interest Payments

By their nature, a longer-term loan means more time spent paying interest. Combined with the long repayment term, interest rate charges are higher on a 30-year mortgage than a 15-year one. This means you’ll end up paying more over the life of the loan than you would for a 15-year mortgage with the same interest rate.

Options For Paying Off Your 30-Year Mortgage Early

Not sure if you can consistently afford the higher payments of a 15-year mortgage but would like to enjoy the savings from paying your mortgage down faster? As long as your mortgage doesn’t include a prepayment penalty, you can make extra payments on the principal when your budget allows.

Prepayment penalties are written into your mortgage agreement. If your mortgage has a prepayment penalty clause, you’ll trigger fees if you pay your principal balance off earlier than you agreed. Some lenders charge prepayment penalties, so be sure to ask about this when you’re choosing a lender for your mortgage.

Make Extra Payments

The great thing about making additional payments is that you can be flexible. Consider putting extra cash – like a company bonus, a modest inheritance, etc. – toward your mortgage principal to pay off your debt earlier.

Even smaller amounts can make a big difference. Set aside a jar to collect extra cash or savings and dedicate the amount to making extra payments on your mortgage each month. Be sure to let your mortgage servicer know that you want the extra money to be a principal-only payment.

Make Biweekly Payments

Another method is to make biweekly mortgage payments rather than one payment each month. Biweekly payments typically match employee payroll schedules and equal 13 yearly payments, so you'll make an extra payment each year.

Not all mortgage servicers offer this option. Check with your mortgage servicing company to see if they allow biweekly payments.

Refinance Your Mortgage

Just because you can’t commit to a 15-year mortgage right now doesn’t mean you can’t refinance later. Let’s say that, right now, a 30-year fixed monthly mortgage payment feels more comfortable for you. Fast-forward 5 years, and you get a big promotion at work and a generous bump in salary. Now might be the time to consider refinancing to a 15-year mortgage.

With the refinance, you can pay off your mortgage in 20 years. You’ll enjoy some of the savings you would have had if you’d chosen the 15-year term without the financial stress of struggling to make each month’s payment.

Consider A Mortgage Recast

If you have a significant sum of money you’d like to apply to your mortgage and want to reduce your monthly payment, consider a mortgage recast. With a recast, you’ll make a lump-sum payment, and your lender will re-amortize your loan with the lower balance and adjust your monthly payments.

The Bottom Line

For home buyers with enough income to make higher monthly payments,15-year mortgages can be ideal. And if you’re not ready to commit to a 15-year mortgage now, that doesn’t mean you can’t enjoy the benefits that come with paying your mortgage off earlier.

Ready to apply? Start your mortgage application online today with Rocket Mortgage^®.