Is a 15-year mortgage better?
A 15-year mortgage can save you tens of thousands of dollars in interest over the life of the loan. You’ll own your home in half the time so yes, a 15-year mortgage is better — if you can afford it.
But your monthly mortgage payment will be higher. Much higher.
Read on to discover the pros and cons of a 15- and 30-year mortgage.Click here for today's mortgage rates.
How does mortgage term impact cost?
A mortgage’s term — the length of the home loan — plays a big part in determining the overall loan cost.
On one hand, a shorter term almost always gets you a lower interest rate. The difference in mortgage rate is variable though. Check a current 15-year mortgage rates chart and compare it with 30-year mortgage rates to see how big the gap is today.
On the other hand, you’re squeezing your payments into 180 months (15 years x 12 months) instead of a longer period of 360 months. So each payment is a lot higher.
However, borrowing for half the period means you’re paying interest for half the time, too. And that saves you a huge amount. How much? Here’s an example:
Example: 15-year mortgage vs 30-year mortgage
Let’s say you’re borrowing $200,000 and have a mortgage rate of 3.060% for the 30-year model. And one of 2.630% for the 15-year one (average rates on the day this was written. They’ll almost certainly have changed by the time you come to read this.)
Keep in mind that this example only looks at the loan principal and interest payments — the amount you pay to your lender each month. So these estimates don’t factor in other home buying costs like homeowners insurance, property taxes or homeowners association fees.
So here are the monthly payments and total interest payable for each of the two loan terms:
Monthly payment: $849
Total interest due over 30 years: $106,048
Monthly payment: $1,345
Total interest due over 15 years: $42,287
The shorter-term payments are $496 more each month, which is beyond the reach for many borrowers — particularly first-time home buyers. But it means you pay nearly $64,000 less in interest.
Can you afford to claim those savings? Can your financial situation accommodate the higher monthly payments? In this particular scenario, that’s literally the $64,000 question. But if you’re borrowing a lot more, there could easily be $100,000 at stake.Ready to shop for your dream home? Start here.
Pros and Cons of a 30-Year Mortgage
Despite the savings of a 15-year mortgage, there are some powerful advantages to a 30-year mortgage. It’s no wonder they are by far the most common loan type. Indeed, in some years, they account for
Pros of a 30-Year Mortgage
- A much more affordable monthly payment
- Lower monthly payments mean you’re able to borrow more and buy a better home
Cons of a 30-Year Mortgage
- Typically get a higher interest rate
- The total cost of borrowing will be significantly higher
- It will take 30 years to pay off the loan
That last point is important to consider.
Suppose you get your first mortgage when you’re 33 years old, the median age for first-time buyers. It’s a 30-year loan so assume you’re going to pay it off when you’re 63 years, which means you’ll be mortgage-free for the best, most active years of your retirement. But every time you refinance to another 30-year term you reset the clock on your mortgage.
If you refinance so after 15 years, when you’re 48, you’ll be 78 at the end of another 30-year mortgage term.
Pros and Cons of a 15-Year Mortgage
Pros of a 15-Year Mortgage
- The overall cost of the loan is much lower and you’ll pay less interest overall
- Build equity much more quickly — thanks to amortization (the amount of principal you pay increases faster each month)
- You’ll be mortgage-free in just 15 years
Cons of a 15-Year Mortgage
- Much higher monthly payments
It’s important to note that, with a 15-year loan, you’re committed to these higher monthly payments. If you don’t make the full payment, you could face foreclosure. If you at some point need to reduce your monthly cost — for example, if your monthly income changes and impacts your cash flow — you’ll have to refinance to a 30-year mortgage.
Of course, there is a way to get some of the benefits of a shorter-term loan while maintaining some of the flexibility of a longer-term. More on that below.Speak with a mortgage specialist today.
Paying Off a 30-Year Mortgage Early
Financial guru Dave Ramsey is a big fan of 15-year terms. It says on his website, “In case it’s not obvious, we don’t think you should ever get a mortgage term longer than 15 years. You’re basically throwing your money and your time away.”
But not everyone agrees. In September 2020, CNBC reported the view of self-made millionaire Steve Adcock, a man who retired in his 30s. He tweeted earlier that year:
“Possibly unpopular opinion: Forget 15-year mortgages. Do 30. Why? Because making extra payments can turn it into a 15-year. And, you can reduce your mortgage payments if times get tough, then resume higher payments later. Give yourself options. Flexibility is nice!”
Pay Your 30-Year Mortgage Off Early
There was a time when some mortgages came with prepayment penalties. In effect, you were fined if you paid down your loan early. But those mostly gone now. Today, you’re generally free to pay what you want when you want — as long as it’s more than your standard monthly payment.
All this means you can get a 30-year mortgage and pay the loan amount down in 15 years, simply by paying more than you need. There are various ways of achieving that:
- Increase every monthly payment by the same amount at a level that halves your 30-year term
- Make more payments each year
- Make one, large extra payment each year
- Use a windfall to reduce your mortgage balance
Of course, you don’t have to pick one of those and stick to it. You can use all four, as your personal finances allow.
Talk To Your Lender First
If you just send extra money to your mortgage lender without explanation, they may be confused. They may assume you’re making advanced payments and might apply the extra funds to paying mortgage interest in advance rather than applying it towards the loan principal.
So talk to your lender before you pay any extra. Make sure they understand what you want to do and follow up with a letter to confirm the conversation so you have a paper trail for your records.
Different lenders may have different rules for prepayment. They might have you make your standard payment and then send a separate paper check for the extra amount with written instructions, perhaps writing in the memo field that you want those funds to apply to your principal. Or your lender may allow you to pay by phone or using an automated banking system.
As long as you make sure your lender knows to apply the extra to your principal, you should be fine. But you might want to check online from time to time to make sure it’s continuing to do the right thing.
Paying Early: Better or worse than a 15-year term?
Is it better to have a 15-year loan or a 30 year one that you pay down early? That’s entirely up to you, your financial goals, and how much you personally value the extra flexibility the early-payment option gives you.
If you’re serious about paying off your 30-year mortgage in 15 years, you should set some goals and milestones to keep yourself on track. It’s easy to plan to pay down your mortgage early but tougher to stick with it — especially without the higher minimum payments to keep you on track.
And remember, you won’t get the lower mortgage rate that typically comes with a 15-year mortgage if you opt for a 30-year term and pay that down early. But you will still be mortgage-free earlier, build home equity faster, and should still save thousands of dollars in interest.Click here for today's mortgage rates.