Should you get a 15-Year or a 30-Year Mortgage?

Blog posted On November 01, 2018

Mortgage loans are available with a variety of terms and interest rates to suit every financial situation.  Mortgage terms can range anywhere from 5, 7, 10, 15, and 30 years and usually have either a fixed interest rate or an adjustable interest rate.  The 30-year fixed-rate mortgage tends to be the most common type of mortgage loan, a stalwart for home buyers since the 1930s and 1940s.  However, in some cases the 15-year fixed-rate mortgage might be the better option. 

With a 30-year fixed-rate mortgage, you’ll have a lower monthly mortgage payment, but you’ll pay more interest over the life of the loan whereas a 15-year fixed-rate mortgage will have a higher monthly mortgage payment, but you’ll pay less interest over the life of the loan.  A 30-year fixed-rate mortgage may also have a higher interest rate than a 15-year fixed-rate mortgage.

For example, if you purchase a $250,000 home with a 20% down payment and have an interest rate of 5%, your monthly mortgage will be approximately $1671.05.  Over the next 30 years, you’ll pay $375,001.20 on mortgage interest.  If you purchase the same $250,000 home with a 20% down payment and have an interest rate of 4.5%, your monthly mortgage payment will be higher, approximately $2,187.48.  But, over the next 15 years, you’ll pay substantially less mortgage interest, about $168,750.  To review more repayment scenarios, you can visit our Mortgage Calculator here.

If you finance with a 30-year fixed-rate mortgage, you can still make larger mortgage payments to pay down your loan principal and save on mortgage interest.  On months when you are unable to make a larger payment, you can pay the lower standard payment.  However, check and see if there is a prepayment penalty before making extra mortgage payments.  Financing with the 30-year fixed-rate mortgage may also give you more money available to save for retirement or invest elsewhere.  The interest on your stock portfolio, for example, may yield a better return than paying down your mortgage.

Whether you choose a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage, you are not stuck with that loan the entire time you live in your home.  You can refinance your mortgage at any time to get a different rate or terms.  Keep in mind, that if you choose to refinance your loan you will have to pay closing costs and other associated fees.

For home buyers who can afford a higher monthly mortgage payment, the 15-year fixed-rate mortgage may be the better option.  For home buyers who may be stretching to cover costs, the lower monthly mortgage payment with the 30-year fixed-rate mortgage could be the better option.  Consulting a mortgage loan officer is the best way to get an accurate comparison and find out which option is best for your current situation and future goals.

Sources: CNBC, Fox Business, Zillow