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Your monthly mortgage payment will probably be the largest line item in your budget. One way to control your payments is by comparing 15-year vs. 30-year mortgage terms. A shorter schedule requires larger payments but allows you to pay off the loan faster, while a 30-year schedule lowers your monthly payments but costs more in interest in the long term.
15-year vs. 30-year mortgages: What is the difference?
Standard lending practices defer to the 30-year, fixed-rate mortgage as the go-to for most borrowers buying a home because it allows the borrower to spread loan payments out over 30 years. Doing so helps keep their monthly payment lower, despite paying more in total interest for the loan.
With a 15-year mortgage, however, borrowers can pay off their loan in half the time — if they’re able and willing to increase their monthly loan payment. The primary difference between qualifying for a 15-year versus a 30-year mortgage is that you’ll need a higher income and lower debt-to-income ratio to obtain the former, because the monthly payments are higher.
Despite a lower rate, your monthly payments will almost always cost less with a 30-year mortgage compared to a 15-year mortgage.
“The longer the term, with everything else being equal, the lower the payment amount because the mortgage amount is amortized over a longer period,” says Teri Williams, president and chief operating officer of OneUnited Bank, adding that along with a more favorable interest rate, a 15-year mortgage would also have a lower annual percentage rate, or APR, than a 30-year mortgage.
Learn more about how 15 vs. 30-year mortgage terms change your monthly costs using our mortgage calculator.
15-year vs. 30-year mortgage example
The difference between a 15- and 30-year mortgage can be significant. Below is an example of the options on a $300,000 loan. We’ve assumed 7.31 percent interest on the 30-year term and 6.5 interest on the 15-year term, based on Bankrate’s national survey of lenders as of August 16.
As an example, on a $300,000 mortgage with a 7.31 percent interest rate, your monthly payment would total $2,058.75 for 30 years. You’d spend $441,150.70 in interest over the course of 360 monthly payments.
A 15-year mortgage carries a lower mortgage rate. So, with a $300,000 15-year mortgage at a rate of 6.5 percent, the monthly payment would total $2,613.32, or $170,397.98 in interest over the life of the loan.
|Mortgage Term||Monthly Mortgage Payment||Total Cost Of Mortgage Interest||Total Cost Of Mortgage|
|30-year at 7.31%||$2,058.75||$441,150.70||$741,150.70|
|15-year at 6.5%||$2,613.32||$170,397.98||$470,397.98|
Though payments are less expensive each month with a 30-year mortgage, the interest rate is higher and paid over a term double in length. Over time, a 30-year mortgage is thus substantially more expensive than a 15-year loan, thanks to heftier interest rates.
15-year mortgage pros and cons
A 15-year mortgage might sound like a more attractive option. You’ll likely save a bundle in interest and pay off your home faster. Still, there are trade-offs to consider.
Pros of a 15-year mortgage
- Typically lower interest rate because it’s easier to predict repayment over a 15-year timeline than a 30-year
- Much less interest paid over the life of the loan, as repayment term is shorter
- Loan is paid off sooner due to shorter loan term
- Builds equity faster, as payments toward interest are lower and monthly payments toward loan principal are higher
- Bigger payments tie up more of your monthly budget and could help deter spending elsewhere
Cons of a 15-year mortgage
- Monthly payments are higher to speed up repayment
- Can be harder to qualify for — you’ll need more money available each month to ensure timely payments
- Less wiggle room in budget for emergencies, as monthly payments are higher
30-year mortgage pros and cons
A 30-year mortgage may give you more breathing room in your monthly budget, and it’s generally easier to qualify for. But you’ll pay far more in interest.
Pros of a 30-year mortgage
- Monthly payments are lower because the life of the loan is extended
- Flexibility to pay back the mortgage sooner as you may choose to make higher or extra payments as you are able
- Potentially more money available for emergencies month to month, as your monthly commitment is less
- Lower income qualifications, as you do not need to prove an ability to make payments on a condensed schedule as with a 15-year loan
Cons of a 30-year mortgage
- Typically higher interest rate and paid over twice the number of years
- Loan takes longer to pay off, as the loan term is 30 years instead of 15
- Temptation to spend money saved each month, as a flip-side of more financial flexibility
- Much more interest paid versus a shorter-term loan, as you are paying toward interest over more years
Is a 15-year or 30-year mortgage better for you?
Keep in mind that the requirements for a 15-year mortgage could be a concern for individuals whose income is seasonal or commission-based.
“The consumer also needs to consider the reliability of their income and debt levels,” says Rocke Andrews, past president of the National Association of Mortgage Brokers.
It can be helpful to run the numbers on mortgage payments for homes at multiple price points. Bankrate recommends following the 28 percent rule and the 36 percent rule. These rules advise buyers that no more than 28 percent of their gross income should go toward a mortgage payment each month and that no more than 36 percent of their gross monthly income should go toward monthly debt payments.
Taking a close look at your monthly budget and financial commitments can help you to determine what kind of a mortgage payment will be feasible and comfortable for you. If you will feel consistently over-extended by the payments on a 15-year mortgage, you may consider making extra payments toward a 30-year mortgage as you are able to for an earlier payoff.
Ultimately, what should drive your decision is what payment you can afford, and whether or not a larger payment would curtail other important financial moves, like saving for retirement. Keep in mind that you may qualify for a much larger loan than is wise to borrow.
Alternatives to 15-year and 30-year mortgages
Some lenders offer other terms for a mortgage, which include:
- 10 year (if you want to be aggressive with your repayment strategy)
- 20 year
- 40 year (most lenders do not offer this; if you do opt for a 40-year mortgage, you may want to refinance down the line)
- Interest-only mortgage
Consider how long you plan to stay in your home versus the duration of the mortgage you’re considering. If your goal is to get as low a payment as possible for a short time (i.e., less than five years), you might want to explore an interest-only mortgage.
“Many people sell their home before 15 to 30 years and pay off their mortgage before the end of the term, so the mortgage term may be less important,” says Williams.
Another alternative: Paying off your loan early
With any mortgage, you can always make higher or more frequent payments to pay off the loan sooner. Most prepayment penalties go into effect only if the borrower pays off the mortgage, or a significant portion of it, within the first five years of the loan.
“If there is no prepayment penalty, which is the norm today, you can pay back the mortgage sooner by making additional payments beyond the minimum payment,” says Williams.
If you do decide to make extra payments, instruct your mortgage lender to apply the funds to the principal or the last payment due. This’ll reduce the interest payable on the balance. There’s generally no limit to how many extra payments you can make (or how often you can make them), so if you have fluctuating income, this can be the next best strategy to a 15-year mortgage.
If you have enough money to make extra mortgage payments, Andrews says it’s worth looking at whether you want to invest that money somewhere else that offers a higher return instead — assuming that investment is relatively lower-risk, since paying off your mortgage is typically less risky than other endeavors.