Home Equity

Why A 15 Year Mortgage Is Better Than 30

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 5 minute read

However, while a 30-year mortgage may lower your monthly payments, a 15-year mortgage may prove to be more cost-effective overall. If you’re in the market for a new house, you may be debating between a 15-year and a 30-year mortgage. Both have advantages and disadvantages. While the monthly payments on a 30-year mortgage are often lower, a 15-year mortgage might save you money over the course of the loan.

Of course, each borrower’s circumstance is unique, and you’ll need to weigh your options before making a decision. Learn about the advantages and disadvantages of 15-year and 30-year mortgages so you can get a good start on the process.

15-year vs. 30-year mortgage: How to compare

It is likely that the length of your loan will have a significant influence on your mortgage payment. Most lenders provide lower rates for loans with shorter terms, which means lower monthly payments and a lower total cost of ownership over time. The monthly payment, loan length, and total interest costs are all important factors to consider when comparing 15-year vs. 30-year mortgages.

Monthly payment amounts

It takes 180 months to pay off a 15-year mortgage. As a result, you’ll pay more each month than you would with a 30-year mortgage, which is amortized over 360 months in total. To illustrate how loan terms affect payment amounts, here are some examples.

15-year mortgage30-year mortgage
Loan amount$200,000$200,000
Interest rate3.50%3.50%
Monthly payment$1,430$898

Loan term

You may get out of a 30-year mortgage in half the time with a 15-year loan, which may be important to you depending on your unique circumstances. A 15-year loan may be a good option for people who want to retire at the age of 65 and who are acquiring a property at the age of 50.

Total interest charges

An additional factor to consider is the level of interest. It takes twice as long to pay off a 30-year mortgage as it does to pay off a 15-year loan. Interest rates might rise dramatically as a result of this.

A $50,000 down payment on a $250,000 home is an example of a down payment that isn’t enough. Your bank offers you a mortgage loan for $200,000 at a 3% interest rate. Over the course of a 15-year mortgage, you’ll pay $48,609.39 in interest. A 30-year loan at 3% interest means you’ll pay $103,554.90 in interest over the course of the loan.

When looking at these two scenarios, it’s clear that a 30-year loan has lower payments per month but saves you more money in the long run. Even while 15-year mortgage rates tend to be less expensive than 30-year mortgage rates, this can vary greatly based on your personal situation and the lender you pick.

Pros and cons of a 15-year mortgage 

A 15-year mortgage may be your best bet if you’re looking for the lowest possible interest rate on a loan.

Pros

  • Shorter loan terms mean less risk for the lender. This means you’ll obtain a cheaper interest rate on your 15-year mortgage.
  • Reduce debt and increase equity more quickly with a 15-year mortgage due to the lower interest rate and greater monthly payment amounts.
  • With lower interest rates and shorter payback terms, you’ll pay less in interest throughout the life of the loan, resulting in a reduced overall cost of the loan.

Cons

  • Paying over a shorter period of time means that your monthly payments will be greater than if you had taken out a loan for 30 years.
  • If you borrow less money, your budget will look tighter because of the increased monthly payments associated with a 15-year loan. You may be able to get a lower loan amount than you would with a 30-year mortgage because of this.
  • If you suddenly lose your job, become ill, or experience another unforeseen incident, you may be at greater risk of default and foreclosure if you have a larger monthly mortgage payment.
  • As a result, you may have less money left over each month for other expenses, such as holidays, an emergency fund, and long-term investments.

Pros and cons of a 30-year mortgage

A 30-year fixed-rate mortgage is preferred by virtually all homebuyers, according to mortgage guarantor Freddie Mac, since it is both affordable and flexible. A 30-year mortgage loan has the following advantages and disadvantages:

Pros

  • Lower monthly payments. A 30-year loan may have lower monthly payments than a 15-year mortgage because of the extended repayment duration.
  • More money. Lower monthly payments mean less of your budget is spent on housing. Lenders may accept you for a higher mortgage if you have “extra” funds in your budget.
  • With less money going toward your mortgage, you’ll have more money to put toward savings, investments, vacations or any other financial objective you’d like to achieve.
  • Owners can deduct mortgage interest from their taxes according to the Internal Revenue Service (IRS). During the first few years of a mortgage, the bulk of your monthly payment is spent on interest. A large tax deduction is possible because of this.

Cons

  • In general, the longer the loan duration, the more interest you’ll have to pay.
  • Borrowers with longer loan periods pay a higher interest rate since the risk is spread out over a longer period of time.
  • You’ll build equity more slowly because a large portion of your monthly payment will be used to pay interest on your loan. Thus, the process of repaying your loan and building equity may take a longer time.
  • If a 30-year loan is available, borrowers may feel pressured into taking on debt that exceeds their means because of the higher loan amounts they would be able to get.
  • Budgeting for unanticipated expenses is often a smart idea.

To determine which is best, consider the following

A 15-year vs. 30-year mortgage may or may not be beneficial for you depending on your financial position. You might be able to get away with a 15-year mortgage if you’re getting near retirement age. First-time homebuyers may have an easier time getting approved for a 30-year mortgage loan.

If you’re still unsure, ask your lender to send you a 30-year amortization schedule. The schedule will show you how much you’d have to pay each month for 15 years, 20 years, or any other period of time you choose to purchase the property outright. A little forethought might allow you to pay off your mortgage early and avoid being tied to a higher monthly payment.

Regardless of your position, your cash flow is likely to be a major factor to take into account. Using online calculators can help you determine if a possible loan is within your financial means. It is possible to input your property taxes, private mortgage insurance (PMI), homeowners’ association fees (HOA), and other expenditures into several mortgage calculators. A more realistic picture of your payment with either a 15-year or 30-year loan term may be obtained by including as much information as possible for both types of loans.

To decide the optimum loan term for you, compare the cost breakdowns of 15-year and 30-year loans, including your monthly payment amount and total interest expenses.

Bottom Line

To receive the lowest interest rate and save the most money on your home’s mortgage, a 15-year loan may be the best option. A 30-year loan, on the other hand, maybe a better option if you need the flexibility to deal with life’s ups and downs. Shop around for the cheapest interest rate and conditions, regardless of whether you pick a 15-year or 30-year mortgage. Check out our list of the finest mortgage lenders to make things easier.

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