15- vs. 30-year mortgages: Understanding the key differences
Quick insights
- While they have higher monthly payments compared to 30-year loans, 15-year mortgages can lower the long-term interest costs of a loan and help buyers own homes sooner.ec-nmdb-june24
- 30-year mortgages have higher interest costs but may provide greater flexibility and buying power for homeowners.
- It may be possible to pay off a 30-year mortgage before the term is up, which can provide some of the benefits of a 15-year mortgage.
As a homebuyer, you may be presented with the 30-year fixed-rate or 15-year fixed-rate mortgage terms. While a 30-year mortgage is more commonly used,ec-nmdb-june24 some homebuyers may want to consider a 15-year mortgage when buying a home.
Understanding the key differences between these loan types can help you know whether a 15-year mortgage or 30-year mortgage better fits your financial goals. Knowing how to pay down a 30-year mortgage in less time may also be an option that has some of the benefits of each type of loan.
What are the key differences between a 15-year and a 30-year mortgage?
Both 15-year and 30-year mortgages are fixed-rate loans, which means you pay the same amount each month in principal and interest over the life of the loan. At the beginning of the loan, you pay more toward interest. As time goes on, more of your monthly payment goes toward the principal.
Here are the key differences:
- Loan length: With a 15-year mortgage, your loan is amortized over 180 months instead of the 360 months for a 30-year mortgage. In other words, you pay the same loan in half the time.
- Interest rate: According to data from Freddie Mac®, the average 15-year mortgage interest rate is often lower than that of the 30-year fixed-rate mortgage.ec-mr-freddie-mac-apr25 This difference tends to be higher when interest rates are higher as an incentive for borrowers.
How do 15-year or 30-year mortgages affect your monthly payments and interest payments?
Let’s assume you need a $400,000 mortgage to buy a home. A lender offers you a 7% interest rate for a 30-year fixed-rate mortgage and a 6.5% interest rate for a 15-year fixed-rate mortgage.
30-year mortgage with a 7% interest rate:
- Monthly payment: $2,661
- Total interest paid: $558,036
15-year mortgage with a 6.5% interest rate:
- Monthly payment: $3,484
- Total interest paid: $227,197
If you were to choose a 15-year mortgage, you’d pay $823 more each month and would save $330,839 in interest over the life of the loan.
Let’s say your lender doesn’t offer a lower interest rate for a 15-year mortgage.
15-year mortgage at 7% interest rate:
- Monthly payment: $3,595
- Total interest paid: $247,156
In this scenario, you’d pay $934 more each month. But even with the same interest rate, you would still save $310,880 in interest over the life of the loan.
What are the pros of a 15-year mortgage?
While a 15-year mortgage will come with a higher monthly payment, there are some key benefits for homebuyers to consider.
Pay less interest
As shown in the examples above, 15-year mortgages tend to have lower interest rates than 30-year mortgages. Also, because of the shorter repayment period, you’ll pay less in interest over the life of the loan.
Own your home sooner
The shorter repayment period of a 15-year mortgage means you can own your home in less time. This allows you to devote less of your income toward housing, which can provide increased financial flexibility.
Build equity faster
With a 15-year mortgage, you’re paying more toward the principal on your mortgage each month. This allows you to build more home equity in less time. This may allow you to leverage your existing equity sooner, should you choose to use a cash-out refinance.refinance-hl000061 Or you could see a better return on investment if you choose to sell.
What are the cons of a 15-year mortgage?
Of course, 15-year mortgages come with some challenges for homebuyers when compared to 30-year mortgages.
Higher monthly payments
As seen in the examples above, even with a lower interest rate, you’ll probably have higher monthly payments with a 15-year mortgage compared to a 30-year mortgage. Before committing, make sure your budget can accommodate the higher payment.
May not be able to borrow as much
Lenders look at your debt-to-income (DTI) ratio, or the portion of your gross monthly income that goes toward covering housing costs and other debts, when considering how much they can extend to you for a home loan. The higher monthly payments that come with a 15-year mortgage may raise your DTI, which can limit how much you can afford to borrow.
If you live in an area with higher home prices, it may make it harder for you to borrow enough to buy.
Harder to qualify
Because a 15-year mortgage comes with a higher monthly payment compared to a 30-year mortgage, lenders may see greater risk potential if your DTI is high. Also, the higher your DTI, the higher your interest rate is likely to be.
Ways to pay off a 30-year mortgage in less time
If you need a 30-year mortgage to cover the cost of a home you want to buy, there may be ways to shorten your repayment period without taking out a 15-year mortgage.
Make extra payments
Many lenders will allow you to make extra payments toward your mortgage principal as long as you’re meeting your monthly commitments. Some borrowers pay extra each month toward their mortgage, while others opt to make an extra payment at the end of the year. Either way, the more you can lower your principal balance, the faster you can pay off your mortgage.
Make bi-weekly payments
If you’re paid biweekly, and your lender allows it, you could choose to make biweekly instead of monthly mortgage payments. Instead of 12 monthly payments, you’d be making 26 payments equal to half your monthly payment or the equivalent of 13 monthly payments per year. This can be a way to make an extra payment each year without having to set aside money yourself.
Refinance to a shorter loan term
If you’re thinking of refinancing your current mortgage, opting for a shorter loan term can help shorten your repayment period. This is especially effective when interest rates are lower, because the lower interest rate may help offset some of the costs of the shorter repayment period.
Consider a mortgage recast
A mortgage recast allows you to make a lump-sum payment toward your mortgage to lower your balance. This can be helpful if you want to lower your mortgage balance but don’t want to refinance to a higher interest rate. To recast your mortgage, you’ll need to communicate with your lender to discuss how much they’ll allow you to pay and under what conditions.
15- vs. 30-year mortgage FAQs
Am I better off with a 15- or 30-year mortgage?
It depends on your goals. If you’re able to afford the higher monthly payments, there are potential financial rewards for a 15-year mortgage. However, if affordability is an issue, you may be better off starting with a 30-year mortgage.
Why do some people choose a 15-year mortgage instead of a 30-year?
Those who take on a 15-year mortgage might do so because they want the financial independence that can come with owning a home sooner. They may also want to save on interest over the long term.
Is it cheaper to pay off a 30-year mortgage in 15 years?
Because 15-year mortgages tend to have lower interest rates, you may not save money by paying off a 30-year mortgage in 15 years.ec-nmdb-june24 However, paying off a 30-year mortgage in less time can provide many of the same benefits of a 15-year mortgage, while providing greater flexibility in terms of how much you can borrow.
In summary
Both 30-year and 15-year mortgages have advantages for homebuyers. The 15-year mortgage may allow buyers to save on long-term costs and own their home sooner, but it may also come with higher short-term costs. The 30-year mortgage may have longer lifetime costs, but it can be more affordable in the short term and give homebuyers greater flexibility and buying power.
Working with a home lending expert can help you weigh your options and decide which is the right fit for you.
