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15- vs. 30-Year Mortgage: Which One's Right for You?

December 23rd, 2020 12:53 PM by Jackie A. Graves

If you are weighing a 15-year mortgage vs. a 30-year mortgage, the shorter loan term will be cheaper in the long run — but it also limits your options.

When it comes to getting a mortgage, one of the most important parts to consider is the loan term. Nearly 90% of homebuyers choose a 30-year fixed mortgage, but you’ll need to consider what’s right for your situation.

Generally, a longer loan term comes with lower monthly payments, but shorter loan terms cost much less in interest.

Here’s how to weigh your options with 15-year and 30-year mortgages:



Your loan term impacts how much you’ll pay for a mortgage

A loan term plays a big role in the interest rate you get, your monthly payment and how much interest you pay over the life of the home loan.

When you take out a home loan, whether it’s a 15- or 30-year mortgage:

  1. You’ll make regular monthly payments that follow an amortization schedule.
  2. A portion of your mortgage payment goes toward the principal balance and interest, and the amortization schedule details how much will go toward each part.

More of your monthly mortgage payment goes to interest in the beginning. Homeowners with a 30-year mortgage will pay more interest versus those with a 15-year mortgage.



Pros and cons of a 15-year mortgage

Because it has a shorter term, a 15-year mortgage will be much cheaper in the long run — but it limits your other options.

Pros

  • You’ll get a lower mortgage rate. Shorter loan terms typically come with lower interest rates because the lender is exposed to fewer years of risk.
  • You’ll build equity faster. You pay down the principal balance faster on a shorter schedule, which is helpful if you want to eventually take out a home equity loan or line of credit.
  • You’ll spend less on interest. Because interest rates are typically lower and you pay down the debt faster, you spend less on interest costs.

Cons

  • Your monthly payments will be higher. You’re squeezing all your payments on a shorter amortization schedule, so your monthly payments increase accordingly.
  • More of your budget goes toward housing. That means less money goes toward investing, saving for emergencies, and spending on things like vacations.
  • You’ll be limited on your home purchase price. Because a 15-year mortgage comes with higher monthly payments, you’ll qualify for a less expensive loan. That might mean buying a smaller home than you originally planned.



Pros and cons of a 30-year mortgage

A 30-year fixed mortgage costs more in interest over the life of the loan, but the monthly payments are more affordable.

Pros

  • Your monthly payment will be lower. The loan term is stretched over a longer period of time, so each payment is lower and therefore more affordable.
  • You’ll have more flexibility in case of emergency. Less of your monthly budget goes toward housing costs, which means more money can go toward investing, saving, or achieving other financial goals.
  • You can get a more expensive home. The lower payments afforded by a 30-year mortgage mean you have a better chance of qualifying for a bigger mortgage.

Cons

  • You’ll have a higher mortgage rate. Because the lender’s risk is spread over more years, interest rates are typically higher.
  • You’ll spend more on your loan overall. Interest costs increase the longer your loan term is.
  • It will take you longer to build equity. As such, you may not have as much to work with if you want to tap into your equity when you retire or use it to buy a new home.

If you’re considering a home purchase, be sure to shop around for the best rates. ChangeMyRate.com makes this easy — you can compare all of our partner lenders and see prequalified rates in as little as three minutes.



 Which loan term is right for you?

When deciding between a 15-year or 30-year mortgage, carefully review your monthly income and expenses. A 15-year loan is best if you have a high income and few other debts, you’re looking for the best mortgage rate, or you want to buy a smaller home.

On the other hand, a 30-year loan is best if you have significant expenses or investments elsewhere, or you want to buy a larger property.

Loan term

Pros

Cons

15-year

  • Lower total interest costs
  • Lower interest rate
  • Shorter path to owning a home outright and getting out of debt
  • Higher payment
  • Less money for other financial goals
  • Limits your home options

30-year

  • Lower monthly payment
  • More flexibility in your budget
  • More home options
  • Higher total interest costs
  • Higher interest rate

 

Another option: Get a 30-year mortgage and pay it off early

In the 30-year vs. 15-year mortgage debate, it doesn’t have to be all or nothing. There’s a way to combine the flexibility offered by a 30-year mortgage with the interest savings of a shorter term.

If your loan no longer carries a prepayment penalty, you can pay off your mortgage early. Simply choose a 30-year term and pay extra toward the principal balance each month. You’re still building equity more quickly, but you also have the ability to handle other expenses if you need to during one month.

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