When to Choose a 30-Year Fixed Over a 15-Year Fixed

Blog posted On October 22, 2020

The 30-year fixed-rate mortgage is America’s Sweetheart of loans — we know her, we love her, and we just can’t get enough of her. For decades, people have depended on the 30-year fixed-rate loan to help finance their home purchases, but the recent record-breaking low mortgage rates might be swaying some home buyers toward the 15-year loan instead.

15-Year Fixed-Rate Benefits

A 15-year fixed-rate loan is a good option for many people who have stable retirement and other savings funds, no high-interest debt, and an ability to comfortably afford a higher monthly mortgage payment. With a 15-year mortgage loan, you can build equity faster, pay off your loan sooner, and save thousands of dollars on interest — over time. For example, if you purchase a $250,000 house with a 30-year fixed-rate mortgage at an interest rate of 3.5%*, you’ll be paying a lifetime total of $154,140 in interest — as opposed to roughly $60,762 for a 15-year fixed-rate mortgage at 3%.

30-Year Fixed-Rate Benefits

If you pay less interest with a 15-year loan, why do 9 out of 10 of home buyers still opt for a 30-year fixed-rate loan? For starters, it’s substantially cheaper on a monthly basis. Again, if you purchase a $250,000 house with a 30-year fixed-rate mortgage at an interest rate of 3.5%, it will cost you about $1,123 per month, while a 15-year fixed-rate mortgage at 3% will cost around $1,726 per month. The money you’re saving per month with a 30-year loan can be put toward other high-interest debts like student loans and credit cards or can be put toward other financial investments like stocks and retirement savings.

Furthermore, a 30-year loan might allow for a bigger home buying budget and a bigger tax deduction. With lower costs per month than a 15-year loan, the 30-year loan might allow more flexibility in your price range. And when you purchase that expensive home with the 30-year loan, the large chunk of change you paid on interest is likely to get large tax breaks.

The Bottom Line

If you’re still torn between the 15-year fixed-rate loan and the 30-year fixed-rate loan, remember: it’s easier to overpay than underpay. Meaning, if you opt for the 30-year fixed-rate loan, you can almost always pay larger payments than the minimal amount owed, (assuming there is no prepayment penalty). This way, you can pay off your loan quicker and save money on interest. However, by choosing the 30-year loan, you give yourself the flexibility to adjust your payments if needed.

Many financial experts agree that mortgage flexibility is key for home buyers. According to financial planner Mark La Spisa, a 30-year mortgage loan is simply a “super-duper flexible” 15-year mortgage. And he’s not alone. Self-made millionaire Steve Adcock advised people to “forget 15-year mortgages,” saying that you “can turn [a 30-year loan] into a 15-year" by making extra payments. “Give yourself options,” he said, “flexibility is nice.”

If you start off your payments higher than the minimal amount, but run into a financial crunch down the road, you can always lower your monthly mortgage payment to your actual payment amount without risk of default.

There are many loan options available for potential home buyers, and no one option is right for everyone. To see more potential mortgage payment scenarios, check out our mortgage calculator, or consult with one of our loan officers to help determine which option is right for you.

_{*Conventional Payment example: If you choose a $225,000, 30 year loan at a fixed rate of 4.75% (APR 4.900%) with a loan-to-value of 80%,  homeowners insurance of $900/yr and property taxes of $2,700/yr, you would make 360 payments of $1,494.14}

Sources: CNBC