15-Year Mortgage vs. 30-Year Mortgage:
Pros and Cons
by Shawn Carvin, Senior Mortgage Banker
When it comes to mortgages, there are actually many choices, but it seems like most buyers think there’s only one choice, the 30-year fixed rate mortgage. Generations of Americans have taken this path to home ownership. But there are other choices that should and must be considered before signing on the dotted line at closing. What if you opted for a 15-year mortgage instead? A shorter term doesn’t suit everyone. But it’s safe to say that many home buyers would be have been better off if they had opted for a shorter term.
30-year mortgage
The 30-year mortgage wins the popularity contest, hands down. Spreading out the pay-off period to a full 30 years provides most borrowers with a relatively affordable mortgage payment. And because it is a fixed-rate mortgage, the monthly payment won’t change over the life of the loan — except for the portion earmarked for real estate taxes and homeowner’s insurance, which are subject to change.
This makes the30-year fixed mortgage one of the simplest and most straightforward home loan options available. It’s easy to understand why it is so popular. Many first-time homebuyers are on tight budgets and lower monthly payments just make more sense for them. Although the borrower ends up paying more for their house over the long run, the monthly commitment is more manageable.
15-year mortgage
The most obvious difference between a 15-year mortgage and a 30-year mortgage is the length of the term. But there’s more to it than just that. Monthly payments will be significantly higher when the loan term is cut in half, so it is a more difficult to qualify for this loan. A borrower’s debt-to-income ratio must be suitable or a 15-Year mortgage won’t even be an option.
The 15-year mortgage can save borrowers a significant amount of money. With lower interest rates offered for the shorter term, the savings add up fast. Another perk of the 15-year home loan is that borrowers build equity in the home much more quickly.
Running the numbers on 15-year vs. 30-year loans
The benefits of a shorter term sound great, but most home buyers pay off their mortgage long before the full 30-year term, either when they sell or refinance the home. So is the added monthly pressure of a 15-year loan really worth it?
As the table below illustrates, $30,151 in savings at 5 years is significant, but by the tenth year, the savings have more than doubled to $77,334. And over the full life of the 30-year loan, the borrower would have saved almost $275,000 by opting for the 15-year mortgage.
$600,000 Fixed-Rate Mortgage |
|||
15-Year at 3.25% |
30-Year at 4.00% |
15-Year Savings |
|
| Monthly payment | $4,216 | $2,864 | |
| Interest Paid, 5 Years |
$84,403 | $114,554 | $30,151 |
| Interest Paid, 10 Years |
$139,108 | $216,442 | $77,334 |
| Interest Paid, 15 Years |
$158,882 | $302,865 | $143,983 |
| Interest Paid, 30 Years |
$431,217 | $272,335 | |
The 15-year mortgage disguised as a 30-year
Interested in the benefits of a 15-year mortgage, but concerned about committing to the higher monthly payments? There may be a compromise. Some homebuyers opt for a 30-year home loan, but treat it more like a 15-year mortgage, making larger monthly payments than required. The overpayment goes straight to the principal balance, resulting in significant interest savings over time. This strategy provides the best of both worlds – the cost savings of a shorter term with the flexibility of making only the minimum monthly payment when necessary.