15-Year Vs. 30-Year Mortgage: Which Is Right For You?
When you’re ready to buy a house, all the options for financing can be pretty overwhelming. Deciding on the right loan may sound like a serious headache, especially if you’re a first-time home buyer – but it doesn’t have to be a hassle.
Today, let’s talk about two of the most common loan terms, 15- and 30-year mortgages, and discuss which one might work best for you.
15-Year Or 30-Year Mortgage: What’s The Difference?
15-year and 30-year mortgages are both loans that allow you to pay for your house over an extended period of time by making monthly payments. The main difference between them is that a 15-year mortgage is designed for you to pay off the loan in 15 years, while a 30-year mortgage is set up for you to pay it off in 30 years instead.
So, why choose a 30-year loan when you could pay it off in 15 years? The differing loan terms affect a few things, including the amount of your monthly mortgage payment and the overall cost of your mortgage. With a 15-year loan, you’ll pay off your loan faster, but your payments will be significantly higher each month.
With a 30-year loan, you get twice the amount of time to pay off the same loan amount, which results in more affordable monthly payments. At the same time, this means you’ll end up paying more interest. In the long term, it may be more expensive to go with what seems like the more immediately affordable route.
Both 15- and 30-year mortgages are usually fixed-rate loans, meaning your interest rate will be the same for the life of your loan unless you refinance. These types of loans differ from adjustable-rate mortgages, or ARMs, where your interest rate may fluctuate or change after a set number of years.
A fixed-rate mortgage is just one of the types of home loans you’ll encounter during the home buying process. Whether a fixed-rate mortgage, an ARM or something else is the best option for you depends on your unique financial situation and how you plan to use the home.
A 15-year mortgage is a home loan designed to be paid off in 15 years. These loans typically have lower interest rates than longer term loans like the 30-year mortgage. At the time this article was written (March 2022), for example, the interest rate for a 30-year fixed-rate mortgage was 4.47%, while a 15-year mortgage had a rate of just 3.64%.
Borrowers choose 15-year mortgages for a few key reasons. These loans help you build equity faster. They also typically have lower rates. Since you pay off the loan in half the time of a 30-year mortgage, you also save a lot on interest – typically tens of thousands of dollars.
The downside to 15-year loans, however, is that your monthly payment is much higher than it would be with a longer loan term. You may pay close to 100% more on a 15-year monthly payment than what you would on a 30-year. That means if you were paying $500 a month for a 30-year loan, you might pay $1,000 a month for a 15-year loan on the same house.
This shorter loan can be a great option for borrowers who want to build equity and own their home more quickly while saving on interest, but keep in mind it won’t be an option for everyone. You’ll encounter many costs as a new homeowner, so you should be sure to closely examine your budget before committing to a shorter-term mortgage. Making too high of a monthly payment could leave you house-poor and struggling with your budget.
A 30-year mortgage is a home loan designed to be paid off in 30 years. It may come with slightly higher interest rates than a 15-year loan, but your monthly payments will still be significantly lower because the cost of your home is spread out over many more years.
This type of loan is a great option for borrowers that want a more feasible monthly mortgage payment than what they would pay for a 15-year loan so they can also budget for other things. If you get a 30-year loan and later decide you’d rather pay off your loan more quickly, it’s good to keep in mind you’re not locked into your repayment term, too. If you want to make larger payments to save on interest over time, you can – and you can also refinance your loan to a 15-year mortgage later on as well to shave years off of your loan, if you can swing the higher monthly payments.
15-Year Vs. 30-Year Mortgage Calculator
To get an idea of what your monthly mortgage payment might look like with both a 15- and 30-year loan, try out our mortgage calculator.
Let’s go over an example to demonstrate how these two loans can make your monthly payment and overall loan cost look different. Let’s say you want to purchase a $300,000 home and you’re not sure whether you should get a 15- or 30-year loan. You make a 10% down payment – which amounts to $30,000. That means the amount you have to repay on your loan is $270,000. For this example, we’ll say you are paying $2,300 in yearly property taxes and $2,305 in yearly homeowners insurance as well.
Using the interest rates from earlier – which are 4.47% for a 30-year loan and 3.64% for a 15-year loan – these would be your monthly payments for each loan and the overall costs you can expect to pay for the life of each loan, as well.
Overall Cost Of The Mortgage
*Keep in mind these numbers are estimates and do not take into account other extra costs of homeownership such as HOA fees, private mortgage insurance, utilities, etc.
Ways To Save On Your Mortgage
If you’re not sure that a 15- or 30-year mortgage is the right choice for you right now – or you already have a loan and you’re not sure how to start saving on your monthly payments – here are a few of your other financial options.
Rate And Term Refinance
If you already have a home loan with a less than ideal rate and you’re looking to save money, consider a rate and term refinance. A rate and term refinance replaces your current loan with a new one that has more favorable terms for you. If you had an interest rate of 8% on a 30-year loan, for example, you could refinance to a new 30-year loan with a rate of around 3% instead.
You can also change the term of your loan this way, meaning you could switch from a 30-year loan to a 15-year loan to cut a few years off your repayment term. Just remember this would also increase your monthly payment, however.
A mortgage recast is another option for borrowers who may already have a loan and are looking to save on their monthly payment. When you get a mortgage recast, you make a lump sum payment toward the balance of your loan to lower your monthly payment. Your interest rate and term do not change, unlike a refinance.
This is a good option if you’ve just received a lump sum of money you want to use toward your mortgage from a source such as an inheritance, profits from selling another house, etc. Most lenders require a minimum of $5,000 to be put down as a lump sum before offering a recast.
Another way to save on your total mortgage costs is to make extra payments – as counterintuitive as that may sound. Making extra payments each month can help you pay off your loan quicker and avoid paying extra interest over time.
This might be a great option for a borrower with a 30-year loan that wants to pay off their loan faster than 30 years but can’t afford to commit to a 15-year loan. Making extra payments at your own pace can save you money without the stress of committing to a shorter loan term.
If you decide to make extra payments, be sure to communicate with your lender so they’re aware that you want to contribute extra money toward your principal balance.
Similar to making extra payments, you can also save a significant amount of money on your loan repayment by making biweekly payments instead of just monthly ones. So, if you currently pay $1,600 a month on your mortgage, you would instead pay $800 every other week.
Paying this way makes your bills a little more manageable – and allows you to make one full, extra monthly mortgage payment each year that can help you pay down your loan balance more quickly.
Rocket Mortgage® Offers YOURgage®
If you’re not sure a 15- or 30-year loan will work for you and you’re still on the fence about trying any of the methods above to make your loan more affordable, another option you have is a YOURgage by Rocket Mortgage. This is a custom-term loan that allows you to select any repayment term you’d like between 8 and 29 years.
This flexible loan allows you to decide a repayment term that fits your needs without worrying about making too high a payment or spending too much on interest.
The Bottom Line
Whether you’re getting a loan for the first time or trying to save on monthly payments, there is a loan option out there for you. 15-year loans are great options for borrowers looking to build home equity fast and own their home more quickly while 30-year loans might be a better choice for those looking to pay off their house at their own pace while building wealth to save for other things.
If neither of those repayment terms sound great to you, remember you can always choose your own loan term with a YOURgage, too, and repay your balance at a pace you choose.
Ready to start the process of getting a mortgage? Get preapproved with Rocket Mortgage online today.