The term of your mortgage decides two things that pull in opposite directions: how much you pay each month, and how much the house costs you in total. A 15-year loan builds equity fast and saves a large amount of interest. A 30-year loan keeps the payment low and leaves room in your budget. Neither is right for everyone, so it helps to see the numbers side by side.
The same loan, three terms
Here is a 300,000 dollar loan at rates typical of the spread between terms. Fifteen-year loans usually carry a noticeably lower rate than 30-year loans, often around half to three quarters of a percentage point, because the lender's money is at risk for less time.
- 30 years at 6.5%: about 1,896 dollars a month, and about 382,600 dollars of interest over the life of the loan.
- 20 years at 6.125%: about 2,171 dollars a month and 221,000 of interest.
- 15 years at 5.75%: about 2,491 dollars a month and 148,400 of interest.
The 15-year loan costs about 595 dollars more a month and saves about 234,000 dollars in interest. That saving comes from two sources at once: a lower rate, and half as many years for interest to build up.
Equity after five years
Many people sell or refinance long before a loan ends, so it is worth looking at the balance after five years. On the 30-year loan you would still owe about 280,800 dollars, having paid off less than 20,000 of principal in 60 payments. On the 20-year loan you would owe about 255,200, and on the 15-year about 227,000. Faster equity gives you more options when you move: a bigger down payment on the next home, or the ability to sell without bringing cash to closing if prices dip.
Who the 15-year loan suits
- You can afford the higher payment and still save for retirement and keep an emergency fund.
- You want to own your home outright by a particular date, such as before your children reach college age or before you retire.
- Your income is stable and the higher payment would not become a strain after a job change.
Who the 30-year loan suits
- The lower payment is what makes the home affordable at all.
- Your income varies, and you want the security of a smaller required payment in a bad month.
- You would rather invest the difference. The 595 dollars a month in our example, invested for 15 years at a 7% return, would grow to roughly 189,000 dollars, though that return is not guaranteed and the interest saving is.
The middle path: a 30-year loan paid like a shorter one
You can take a 30-year mortgage and voluntarily pay more. Paying the 15-year payment of 2,491 dollars on the 30-year loan at 6.5% clears it in about 16.3 years with about 187,000 dollars of interest. That costs more than the true 15-year loan, because the rate is higher, but it keeps your required payment at 1,896 dollars. If money is tight for a few months, you drop back to the minimum without any penalty. For people who value flexibility, this is often the best of both.
The discipline is the hard part. If you know the extra payment will quietly stop after a year, the 15-year loan's forced savings may serve you better.
Questions to ask yourself
- Could I make the higher payment comfortably if my income fell by 10%?
- Am I already saving at least 15% of my income for retirement, including any employer match?
- How long do I expect to stay in this home?
- Would I really invest the difference, every month, if I chose the 30-year loan?
Run your own comparison
Rates on the day you lock matter more than any example. Ask your lender for quotes on both terms, then enter each one in the mortgage calculator to compare the full monthly payment, including taxes and insurance, and the total interest. The amortization calculator shows the balance at any future date.
Estimates only, not financial advice. Rates in the examples are illustrative.