Choosing Between a 30-Year and 15-Year Mortgage: Which Is Right for You?

What Mortgage Length Is the Best:15 or 30 Year?

I’ve always believed that if you need to finance something, you probably can’t afford it. However, I think this doesn’t necessarily apply to financing a house, as long as you’re not taking on more than you can handle.

Why? Because once you leave your parents’ house, you’ll always have to pay for housing, whether through renting or owning. Mortgaging an affordable house within your budget, with a fixed-rate and low interest rate, can be a smart move. The key is being wise about it, including deciding on the right mortgage term.

The mortgage term is the length of your loan, and the longer the term, the more interest you’ll pay over time. Common fixed-rate mortgage terms are 10, 15, 20, 25, and 30 years. The interest rate typically only changes significantly when you get to 15 years or less. (For example, rates for 30, 25, and 20 years are usually the same, as are the rates for 15 and 10 years.)

Unsure whether to choose a 30-year or 15-year mortgage? Let’s look at some numerical examples and review the pros and cons of each to help you make the right decision.

Example Scenario

Given the significant differences in monthly payments and total payments over the loan’s life, let’s start with an example.

Consider a loan amount of $150,000. Financed for 30 years at 4.0% interest, the monthly payment would be $716 (excluding taxes and insurance), and the total payments over the loan’s life would be $257,804.

This means you’d pay over $100,000 in interest, effectively paying $257,000 for a house that may be worth only $150,000 at purchase.

For the same loan amount of $150,000, financed at 15 years with a slightly better rate of 3.5%, the monthly payment would be $1,072, and the total payments would be $193,018.

While you pay a significant amount of interest in either case, the 15-year loan saves you over $60,000 in interest, and you’ll have the house paid off in half the time.

For a personalized view, use a mortgage calculator with your own numbers to see your options more clearly.

Common Choices

In my experience as a mortgage broker, the vast majority of people opt for the longest term available, usually 30 years. If longer terms were available, they’d likely be popular too. About 90% of the loans I handled were 30-year terms, with the remaining 10% typically on a 15-year term.

Many people focus solely on affording the minimum monthly payment on a 30-year loan, not considering how long it will take to pay off. While 30 years is a long time, many don’t think about the long-term implications. Who wants to still be paying a mortgage decades from now?

30 Years vs. 15 Years

A 30-year mortgage has its advantages, such as lower monthly payments, freeing up money for other investments, or giving you more room in your budget. However, the trade-off is paying significantly more interest over time.

A 15-year mortgage, on the other hand, allows you to pay off your home faster, achieving debt freedom in just a decade and a half and paying much less in interest.

Invest Instead?

Some people choose a longer mortgage term with lower payments to invest their extra money instead of paying down their house. This strategy can work if you earn more in investment returns than you save in interest payments. However, investing involves risk, whereas paying down your mortgage guarantees a return in the form of interest savings.

If you opt for a 30-year mortgage to invest the difference, you must be disciplined to ensure the money goes into investments, not other budget items.

Don’t Sacrifice Your Retirement

While paying off your mortgage quickly is a worthy goal, don’t do so at the expense of your retirement savings. The compounding interest in retirement accounts like 401(k)s or IRAs can significantly build your wealth over time.

Never forgo retirement savings to pay off a low-interest mortgage. At a minimum, contribute enough to your retirement account to get any employer match, as it’s essentially free money.

Affordability

When considering how much of a mortgage payment you can afford, don’t rely solely on what the bank says you can borrow. That figure can differ significantly from what you’re comfortable paying. Think about what you can pay off in 15 years or less. If the 15-year payment is daunting, consider a 20-year term for some breathing room.

To determine affordability, you need to budget and track your spending. Also, establish an emergency fund regardless of your mortgage term to cover unexpected situations.

My Experience

Despite being a former mortgage broker, I made the mistake of choosing a 30-year mortgage for our last home, following the crowd. We’ve been paying for it ever since, literally. Luckily, we locked in at a low rate, making refinancing less beneficial due to closing costs. Instead, we’ve doubled or tripled our mortgage payments to pay it off sooner, significantly reducing the amount lost to interest.

If you’re in a similar situation and considering refinancing at a low rate, compare the benefits of doubling your payments versus refinancing to a 15-year mortgage with added closing costs.

Advice – Aim to Become a True Homeowner

My advice is to pay off your mortgage as quickly as possible to achieve complete debt freedom. However, if you prefer the security of lower 30-year payments and can discipline yourself to pay it down as a 15 or 10-year mortgage, then go for it.

I believe you shouldn’t buy a house you can’t afford to finance on a 15-year term, but that’s my preference. Avoid overextending yourself, especially with real estate, likely your biggest expense. Leave room for life and a secure financial future instead of a 30-year mortgage payment.

Challenge yourself to take on the shortest term you can manage comfortably and focus on paying off your mortgage to become a true homeowner.

Study Your Truth-in-Lending Statement

If you’re ready to buy a house, sit down with your mortgage broker and ask for several truth-in-lending statements to see the differences in each term. The interest payments over the loan’s life in each scenario can be vastly different and eye-opening.

Your truth-in-lending statement is valuable as it shows the amount of interest you’ll pay over the loan’s life.

Shop Your Rates

Don’t forget to shop around for the best interest rates. Spending a few hours comparing rates can save you thousands over the life of the loan. Even a slight improvement in the rate can mean significant savings, so be diligent and shop around to get the best deal.

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