If you're buying a home, one thing you should know is that not all mortgages are created equal. Different mortgage lenders offer different rates, and the length of your repayment period will also affect your rate. This is why you may be torn between a 15-year vs. 30-year mortgage. Each offers its own benefits and drawbacks, so let's explore whether a 15 vs. 30-year mortgage term is right for you.
With a 15-year mortgage, you'll repay your home loan in half the time it would take to repay it under a 30-year loan. That means each monthly payment of yours will be higher on an individual basis, but you'll also save money overall on mortgage interest for two reasons:
If you can afford a higher monthly payment, a 15-year loan may be worth it. But if you can't manage a higher monthly payment, then stretching your budget to keep up with a 15-year loan could put you in a position where you risk falling behind on your mortgage, and so pave the way to foreclosure. Ouch.
Furthermore, don't forget that when you take on higher monthly payments, you lose out on the opportunity to do other things with that money. A 15-year mortgage could, therefore, make it more difficult for you to consistently fund a retirement plan or save for college. But on the flipside, you'll be done with those payments sooner than you would be with a 30-year loan. So while you may need to put other goals on hold in the near term, you'll then have an opportunity to catch up once your home is paid off.
With a 30-year mortgage, your monthly payment will be lower than with a 15-year loan, which makes those payments fit more easily into your budget. On the other hand, you'll pay more interest over the life of your loan because you'll have:
Many people can't afford the higher monthly payments that come with 15-year loans, so if that's the case for you, a 30-year mortgage could be your ticket to homeownership sooner rather than later. Just be aware that you'll be paying off that home loan for a very, very long time.
In order to really understand the difference between a 15 vs. 30-year mortgage, it pays to crunch some numbers and see what financial impact each option will have. On Oct. 26, 2020, the average mortgage rate for a 30-year fixed loan was 2.887%. For a 15-year loan, it was 2.415%. That's quite a difference in interest rate when comparing a 15-year vs. 30-year mortgage loan.
Now, let's see what that means in terms of a monthly payment. Imagine you're taking out a $100,000 loan with a 30-year term and an interest rate of 2.887%. (You can use our mortgage calculator to put in your exact principal balance.) Your monthly payment will be $415.80 for principal and interest, but you'll also pay a total of $49,688.97 in mortgage interest over the life of that loan.
On the other hand, if you take out a $100,000 loan with a 15-year term and an interest rate of 2.415%, your monthly mortgage payment will be $662.65 for principal and interest. That's a lot higher than your monthly payment with a 30-year loan. But over the life of your loan, you'll spend just $19,278.05 on mortgage interest -- roughly one-third of the interest you'll pay on a 30-year loan.
Even if we apply the same interest rate to a 15 vs. 30-year mortgage, you'll see that the numbers work out similarly. We've seen what a 2.887% interest rate means for a 30-year loan. If we apply it to a 15-year loan, that monthly payment goes up to $685.40 for principal and interest, and total interest paid climbs to $23,371.76. That's still a huge difference on both counts.
Therefore, if you're not sure whether to get a 15-year vs. 30-year mortgage, you may want to ask yourself: How much of a monthly payment can I afford? If you can swing a higher payment without hurting yourself from a cash flow perspective, then a 15-year mortgage will save you a lot of money over time. But if your budget only allows for a lower payment, then a 30-year mortgage is the way to go. Ultimately, choosing between a 15 vs. 30-year mortgage isn't an easy decision to make as a borrower, so take the time to run the numbers before pulling the trigger.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.