15- Vs 30-year Mortgage Loans: What Is Right For You?

When you’re sifting through options with mortgage lenders for loans, one of the earliest answers to figure out is the loan term. So, is a 15- or 30-year loan right for you? As you can imagine, this is not a “one size fits all” decision. Both loan terms have their pros and cons. Let’s look at 15- vs 30-year mortgages to determine what may be best for your unique situation.

What 15-Year And 30-Year Mortgages Have in Common

Both options are fixed-rate mortgages, meaning once your rate is locked in, it won’t change. Each starts with a principal balance, or the actual amount of the loan–not the total purchase price. The loan balance shrinks over time as you make loan payments. Banks often amortize the loan, where you pay more interest upfront and more on the principal down the road.

Your specific mortgage interest rate and monthly cost depend on overarching market conditions, plus some that are in your control. That’s the amount of the loan, the down payment, your credit score, and your debt-to-income ratio. Other factors may influence your actual minimum payment amount. For instance, borrowers with less than a 20% down payment often have to pay private mortgage insurance as a condition. The most favorable rates go to those with low DTI ratios, high down payments, and strong credit scores.

The 15- or 30-year term can be conventional loans or nonconventional, also known as jumbo loans. Most lenders charge an origination fee, and you can pay points to lower the interest rate. These are not adjustable-rate mortgages, where your interest rate while change after a set period of time.

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 loan cost is between half a percent and one percent less than a 30-year mortgage, but these rates fluctuate with market conditions. While half a percent difference may not sound like a lot right now, it definitely accumulates over time! The substantial savings can amount to thousands of dollars!

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

Not to mention, with a shorter-term loan, you’ll become a free and clear homeowner in about half the time!

The drawback is the larger payments may not leave as much wiggle room in your budget depending on your personal situation.

30-Year Mortgages

This is the most popular mortgage, preferred by about 90% of financing home buyers. The monthly payments are more affordable because you’ll pay 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 term counterpart. The government-backed agencies like Fannie Mae and Freddie Mac also make loan-level price adjustments on 30-year loans.

The lower monthly payments do give home buyers more financial flexibility. The owners have more extra money available for long-term savings and other financial goals. The 30-year term may financially benefit those who can make additional payments on the loan balance, especially if the mortgage rates are low. Financially disciplined homeowners can make payments at the same level as a 15-year home loan while paying the interest on the 30-year. Effectively, they’d still have a shorter-term mortgage.

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. The longer-term loan makes the monthly payment more affordable.

That being said, there are plenty of reasons why homeowners think 30-year fixed-rate mortgages are the more desirable of the two options.

Comparing 15-Year-and 30-Year Term Outcomes

*Based on December 18, 2023, national average interest rates

As you can see, the 15-year fixed-rate mortgage saves $287,717.19 over the life of the loan. That’s almost as much as the initial mortgage balance!

How to Determine the Loan That’s Best for You

When deciding what type of mortgage is ideal, look at the bigger picture. Run the long-term costs of the loan. Of course, your short-term financial picture matters, too, like your current income and debt obligations. 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 is any prepayment penalty. You may be tempted to just make bigger monthly payments or extra payments on your 30-year loan 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 prepayment penalty. Check with the specific loan terms to see if prepayment is an option.

There are many levers to pull to make mortgages more affordable. Ask your mortgage loan officer about recasting, or biweekly mortgage payments. Some even different shorter mortgage term products, like a 10-year or 20-year home loan.

Ask the Advice of Experts!

The 15-year or 30-year mortgage are both solid options to meet your dreams of homeownership. Use a mortgage calculator to play around with the possibilities for savings or affording a home. Still unsure what loan option suits your needs based on the differences between 15- and 30-year mortgages? An experienced real estate agent, loan officer, or certified public accountant can help determine how much money you can save with a 15-year mortgage!  Ultimately, it’s all about how these mortgage terms fit in with your current financial situation and future goals.

Updated August 2024