Your monthly mortgage payment is likely to be the largest line item in your budget. Choosing between a 15-year mortgage and a 30-year mortgage can give you some control over how large your monthly payments are and how long you’ll pay them for. Both can vary substantially depending on which option you choose. You can sign up for a Bankrate account to crunch the numbers with recommended mortgage and refinance calculators.
15-year vs. 30-year mortgage
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, keeping their monthly payment lower, despite paying more in total 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 bump up the amount of 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.
For example, on a $250,000 mortgage with a 3 percent interest rate, your monthly payment would total $1,054 for a 30-year mortgage and $1,726 for a 15-year mortgage, a difference of $672. All told, you’d pay $379,446 over the life of the 30-year loan, and $310,783 for the 15-year mortgage.
Qualifying for a 15-year mortgage, though, generally means you’ll get a lower mortgage rate. So, with a $250,000 15-year mortgage at a rate of 2.8 percent instead of 3 percent, the monthly payment would total $1,702, a difference of $648. This brings your payments in total down to $306,474.
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,” explains 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.
On a recent day at OneUnited Bank, for instance, the APR was 2.742 percent on a 15-year mortgage and 3.260 percent on a 30-year mortgage, says Williams. The higher rate reflects the risk of holding a fixed-rate loan over the additional 15 years.
15-year mortgage pros and cons
A 15-year mortgage might sound like a more attractive option, but there are tradeoffs.
- Interest rate is typically lower
- Much less interest paid over life of loan
- Loan is paid off sooner
- Builds equity faster
- Underwriting may be more lenient due to less risk
- Bigger payments could help deter spending elsewhere
- Monthly payments are higher
- Can be harder to qualify for
- Less wiggle room in budget for emergencies
30-year mortgage pros and cons
A 30-year mortgage may give you more breathing room in your monthly budget, but you’re in it for the long haul.
- Monthly payments are lower
- Flexibility to pay back the mortgage sooner
- Potentially more money available for emergencies month to month
- Lower income qualifications
- Interest rate is typically higher
- Loan takes longer to pay off
- Temptation to spend money saved
- Much more interest paid versus a shorter-term loan
Is a 15-year or 30-year mortgage right 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,” notes Rocke Andrews, immediate past president of the National Association of Mortgage Brokers.
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.
Also, 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 period of 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.
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.