What's best: a 15- or 30-year mortgage?


There are a lot of considerations to weigh before you decide which mortgage is right for your situation and time horizon.



The differences between a 15- and 30-year mortgage are simple: a 15-year loan has a lower interest rate and higher monthly payments, but you pay less interest over time. The 30-year loan has a higher interest rate and lower monthly payments, but the total amount of interest you pay over the life of the loan is substantially higher.

Let's see what that looks like. In this example, here's the difference between buying a $200,000 home with a 15- and a 30-year fixed-rate mortgage. We used the mortgage amortization calculator on bankrate.com to calculate these numbers:

Interest rate Monthly Payment Total interest paid over the loan term
15-year fixed-rate mortgage 3.5% $1,429.77 $57,357.71
30-year fixed-rate mortgage 4.5% $1,013.37 $164,813.42

At a glance:

15-year fixed-rate mortgage

Pros:

  • You pay less total interest over time.
  • You'll own your home free and clear sooner.
  • You won't have mortgage payments to make after your loan is repaid, so it's ideal if you plan to retire in 15 years or anticipate lower income in the future.

Cons:

  • Your monthly payments are higher.
  • You'll have less mortgage interest to deduct from your taxes.
   
30-year fixed-rate mortgage

Pros:

  • Your monthly payments are lower, giving you more cash flow each month.
  • You'll have more mortgage interest to deduct from your taxes.

Cons:

  • You pay considerably more total interest over time.
   

Other factors to consider

There's more than just math to consider when you're deciding which mortgage is right for you. Make sure you also think about these important questions:
  • What can you realistically afford?
    In our example above, the 30-year loan works out to a monthly payment of $416.40 less than the 15-year mortgage. If you couldn't comfortably make the higher payment, the 30-year loan is the better option. You can always make extra payments toward principal when you have extra cash.
  • How much savings do you have?
    If you choose the 15-year loan with the higher payment, you need savings in place to cover the payments if you lose your job or have a financial setback. If you don't have a substantial emergency fund, you're probably better off with the 30-year loan while you build your savings.
  • Will you still be able to meet your other financial goals?
    If you're leaning toward a 15-year mortgage, make sure you'll be able to continue saving for retirement, college, or other important goals in your life. If you can't, go with the 30-year loan.
  • How's your personal discipline?
    Another option is to get a 30-year mortgage and pay it off in 15 years by making extra payments toward the principal. Then, you'd get all the benefits of the 15-year mortgage, but you wouldn't be locked into the higher monthly payment if you became unemployed or had a financial setback. The drawback is that most people lack the discipline to send in the extra money every month when it's not required by the bank. If you can muster up the discipline, this option could be a good compromise between a 15- and a 30-year loan.

Which one's right for you?

In the end, your financial situation will determine the right choice for you. If you can make the higher payment, have a substantial emergency fund, and can meet your other savings goals, a 15-year mortgage is a good way to own your home in half the time and pay substantially less interest.

But if you realistically can't meet these three conditions, stick with a 30-year loan and make extra payments whenever you can to lower your overall interest expenses.

If you need help deciding between a 15- and a 30-year mortgage, talk to a professional – like your local Rabobanker. We're always here to help.





The information contained in this article is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.