How to Choose: 15- or 30-Year Mortgage?
If you’re preparing to buy a home, you will need to look at not only mortgage interest rates, but also loan types and terms. Your mortgage term is how long you have to repay the loan, and most terms are 15 or 30 years.
Should you get a 15- or 30-year mortgage? If you can afford the payment on a 15-year mortgage, the long-term interest savings are great. But the lower monthly payment of a 30-year mortgage could offer you more flexibility if your financial situation changes.
Here’s more about 15- and 30-year mortgages, including their pros and cons, and how to decide between the two.
What Is the Difference Between a 15- and 30-Year Mortgage?
The primary difference between a 15- and 30-year mortgage is the length of time to pay off the loan.
A 15-year mortgage pays off your home in half the time of a 30-year loan and saves on interest overall. Borrowers typically pay lower rates for 15-year loans than their 30-year cousins because the shorter term reduces risk for lenders.
The shorter term means that more of your payment goes toward paying down principal, and you can build equity faster than with a 30-year mortgage. The trade-off is a higher monthly payment than a 30-year mortgage: at current rates, about 30% higher.
A 30-year loan’s lower monthly payment can give you more cushion in your budget.
“The 30-year mortgage stretches out the repayment, making it feel like the house is more affordable,” says John Schmoll, founder of the personal finance website Frugal Rules.
Pros and Cons of 30-Year Mortgages
- Lower monthly payments than a 15-year loan because they are stretched out over a longer time. “With a 30-year mortgage, you can always pay more toward your mortgage if you’re comfortable,” says David Krichmar, a mortgage banker in Houston. This could be harder to do on a 15-year mortgage, which has significantly higher payments.
- Easier to qualify for this loan with its smaller payments.
- Greater room in your budget for other financial goals.
- Higher interest rates because lenders consider a 30-year loan a greater risk than a 15-year mortgage.
- Higher total interest paid.
- Slower growth in home equity than a 15-year loan.
Pros and Cons of 15-Year Mortgages
- Lower interest rates compared with 30-year loans because lenders take on less risk with a short term.
- Lower total interest charges than a 30-year mortgage.
- Quicker loan payoff. You will own your home in half the time of a traditional 30-year loan.
- Faster equity growth. More of your payment goes toward principal and less toward interest, Schmoll says.
- Higher monthly payments compared with a 30-year loan.
- You may not qualify for as big of a loan because of the higher monthly payments.
- Larger payments leave less flexibility for other financial goals, such as saving.
15- vs. 30-Year Mortgage: How to Decide
Deciding between a 15- or 30-year mortgage comes down to affordability and flexibility. A 15-year mortgage can offer savings if you have steady income to support your monthly payments and other expenses, including emergencies.
“If you’re comfortable with the payment, the 15-year mortgage is the way to go,” Krichmar says. “It’s putting you in the best position possible moving forward.”
Age may be a factor in your decision whether to get a 15-year mortgage. If you’re retiring in about 15 years, you may be more comfortable doing so without a mortgage payment, Krichmar says. A 40-year-old borrower, for example, could pay off a 15-year mortgage by age 55 but would owe on a 30-year mortgage through age 70.
If you’re not sure whether a 15-year mortgage is a slam dunk, a 30-year loan is a safe choice. “For anyone who is a little uncomfortable buying a home, the 30-year mortgage would be stronger,” Krichmar says.
You can always add to your payment and pay off your mortgage ahead of schedule, or refinance your loan to a 15-year term. But if you want to pay ahead, first check that your lender doesn’t charge a prepayment penalty.
A 30-year mortgage can also be a good choice for first-time buyers who don’t yet grasp the cost of homeownership or for borrowers who might have to make a financial stretch. This loan can give you more wiggle room in your budget if you have a retiring spouse or a new baby, for instance. Do the math and calculate your potential mortgage payment before you decide.
Keep in mind that 30-year mortgages are far more common than 15-year loans for a reason: They are more affordable. The lower payment will give you more flexibility, especially if your financial future is uncertain or your dream home wouldn’t be within reach with a 15-year mortgage.
If a 15-year mortgage is too much of a burden on other goals, you may want a 30-year mortgage.
“It’s best to look at your holistic financial picture and goals when looking at the two mortgage options,” Schmoll says. “That will help dictate what is best for your needs.”