15-Year vs. 30-Year: The Ultimate Mortgage Showdown
When trying to decide between a 15-year fixed rate mortgage and a 30-year fixed rate mortgage, the Internet can be a confusing place for research. Just try Googling “15-year vs. 30-year mortgages” and you’ll see a plethora of pros and cons and a mixed bag of advice.
What’s an Internet-savvy homebuyer to do?
Your goal, of course, should be to choose the mortgage plan that’s right for you. To do that, consider the basic difference between a 15- and 30-year mortgage, and the advantages of each.
More Per Month vs. More Overall
15-year mortgages have higher monthly payments and lower interest rates.
30-year mortgages have lower monthly payments and higher interest rates.
For example, say you get a $100,000 mortgage. Your options are a 15-year fixed mortgage at 3.75% interest or a 30-year fixed mortgage at 4.75% interest.
With the 15-year, your monthly payments will be $727.22. Over the life of the loan, you’ll pay a total of $30,900.04 in interest.
With the 30-year, your monthly payments will be just $521.65. However, your total interest comes to $87,793.04.
Advantages of the 15-Year Mortgage
- Save money in the long term! In the above example, you pay nearly $56,900 less in interest compared to the 30-year option.
- Own your home faster. Not only will you finish making your payments in half the time, you’ll also build up equity in your home much faster than you will with a 30-year mortgage.
Advantages of the 30-Year Mortgage
- Save money in the short term! Even though you’ll be paying more for the 30-year mortgage in the long term, your lower monthly payments mean more money in your pocket right now. In the example above, you’d pay about $200 less per month than you would with a 15-year mortgage. Depending on your situation, that $200 might be better off in a retirement or college savings plan.
- Lower stress. Even if you can afford the higher 15-year mortgage payments now, you might be better off locking in lower monthly payments in case your financial situation changes in the future.
- Greater flexibility. The 30-year mortgage offers the flexibility to make payments faster without being locked into a higher monthly payment. Let’s say you sign the hypothetical 30-year mortgage, but choose to pay the higher 15-year payment of $727.22. Under this scenario, you’d pay off the home in just 16.5years. You’d also spend only $44,678.42 in interest—still more than you would under the 15-year plan, but much less than you’d normally pay under the 30-year. Plus, if money was tight for a few months, you could always make lower payments.
The best way to decide on the right mortgage for you is to apply all of this guidance to your personal situation. Check out these mortgage calculators to help you understand your own financial scenarios.
This article originally appeared in Homestead, our home-buying and personal finance magazine.