15- and 30-year Mortgage Loans: What is right for you?

When you’re sifting through options for mortgage loans, one of the biggest questions you’ll be asking is whether a 15- or 30-year loan is right for you. As you can imagine, this is not a “one size fits all” decision. Both loan terms have their pros and cons. Here’s an overview of the differences between 15- and 30-year mortgages to determine what may be best for your unique situation.

15-Year Mortgages

15-year mortgages can dissuade borrowers because the monthly payments are higher. However, because the interest rates are lower and the loan length is shorter, you will pay less for your mortgage overall. Typically, the cost is between half a percent and one percent less than a 30-year mortgage, but these rates fluctuate. While this difference may not sound like a lot right now, it definitely accumulates over time!

Additionally, more of your payment is applied toward the principal, so you’ll build equity in the home faster than a 30-year home loan.

30-Year Mortgages

This is the most common home mortgage, preferred by about 90% of financing home buyers. The monthly payments are more affordable because you’ll be paying your mortgage over a longer period. However, with higher interest rates and longer terms, the total cost of a 30-year loan is more expensive than its 15-year counterpart.

That being said, there are plenty of reasons why homeowners think these mortgages are the more desirable of the two options. Most importantly, a 30-year mortgage may allow you to buy a house valued at a higher price than you’d get with a 15-year mortgage.

Comparing 15-Year-and 30-Year Outcomes

*Based on December 18, 2023 mortgage rates

How to Determine the Loan That’s Best for You

When deciding what type of mortgage is ideal, look at the bigger picture. What are the expenses you’re covering right now besides the cost of your home? Are there other goals you’re working toward that require you to open your wallet? If so, you may want to go with a 30-year mortgage for more disposable income right now.

In addition, a 30-year mortgage frees your budget to help build up your savings. Home expenses generally carry the most weight on a monthly budget. When monthly payments are smaller, as with a 30-year mortgage, you can put away more savings, which could go toward a new car, a child’s college fund, continuing education, or something else important to life goals.

On the other hand, if you have a little more disposable income or are approaching retirement, you may want the 15-year loan because it will ultimately save you money. Maybe you’re a young couple with plenty of income, and you’re not planning on having kids until several years. Getting a larger portion of your house paid off first may be in your future’s best interest.

Another consideration you’ll have to make is regarding a prepayment penalty. You may be tempted to just make bigger payments on your 30-year mortgage so you can pay it off quicker and enjoy the lower price of a 15-year mortgage. However, you won’t get off that easily if your mortgage comes with a pre-payment penalty. Check with the specific loan terms to see if pre-payment is an option.

Ask the Advice of Experts!

Still unsure what suits your needs based on differences between 15- and 30-year mortgages? An experienced real estate agent or certified public accountant can help determine how much money you can save with a 15-year mortgage! You can use a mortgage calculator to play around with the possibilities. Ultimately, it’s all about how these mortgage terms fit in with your financial future goals.

Updated December 2023