Mortgage Comparison: 15- Vs. 30-Year Mortgage

While many of us dream of owning our own home, few of us feel prepared to assume the realities of buying a house and applying for a mortgage. If you’re buying your first home, it may seem particularly impossible to imagine yourself committing to something for the next 30 years. 

You may be committed to the personal money management skills you’ve adopted in anticipation of applying for a mortgage loan, and reading about how much money you can save with a 15-year mortgage. You may feel like this is the financially responsible loan to choose.

However, in the long run, the best choice is to find the sweet spot between what you can comfortably afford on a monthly basis and the overall costs of the loan.

Let’s talk about two of the most common loan repayment 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.

15-Year Mortgage: A Closer Look

Let’s take a deeper dive into the 15-year mortgage.

What It Is

A 15-year mortgage is a home loan designed to be paid off in 15 years. That means the borrower who opts for a 15-year loan must pay back the principal at double speed.

These loans typically have lower interest rates than longer term loans like the 30-year mortgage. Put simply, 15-year mortgages are less risky for lenders because it’s easier to make a prediction about what inflation will be over the next 15 years than it is over the next 30 years.

Why You Might Choose One

They’re cheaper, because you pay off the loan faster and because of the lower interest rate. However, the monthly mortgage payment is, as you might expect, much higher than the payment on a 30-year mortgage would be.

This shorter loan can be a great option for borrowers who want to build home equity faster and own their home outright more quickly. 

Keep in mind that you’ll still owe property taxes and homeowners insurance premiums, which you may have been paying monthly into escrow along with your loan repayments. While you remain the owner of the home, you’ll need to make these payments going forward in a lump sum when due.

Why You Might Elect Not To

Keep in mind that 15-year mortgages aren’t right for everyone, and you shouldn’t feel bad if you select a 30-year option.

First of all, if you’re looking for a home or have recently purchased one, the housing market has been brutal to buyers. If you’ve bought, you’ve prevailed over a prolonged seller’s market and likely paid previously-unheard-of prices for your home, which you may not even have had a chance to see in person before making an offer. Of course, it’ll be that much harder to afford an accelerated repayment schedule.

Having had little choice but to buy a home that may have fallen far short of your wish list, you’ll also want some financial freedom to undertake renovations or buy new furniture. You’ll also encounter many unexpected costs as a new homeowner, so you should be sure to generously pad your household expenses budget before committing to a shorter-term mortgage. Making too high of a monthly payment could leave you feeling house-poor and struggling with your budget.

30-Year Mortgage: A Closer Look

The typical American mortgage loan is made possible by the influence the U.S. government exerts on the mortgage industry. In short, by authorizing Fannie Mae and Freddie Mac to buy loans originated by a variety of lenders, the government keeps lenders liquid so they can continue to make longer-term home loans.

What It Is

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 twice as many years.

Why You Might Choose One

This type of loan is a great option for borrowers who need a more affordable 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 also good to keep in mind you’re not locked into your repayment term. 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.

Why You Might Elect Not To

If your budget can handle the more aggressive repayment term of a 15-year loan, you will save money on interest over the life of your loan. A 30-year loan also means you won’t own your home outright as quickly. It’s also worth keeping in mind that if you build up equity in your home at a faster rate via a shorter loan term, you will more quickly be able to leverage that equity for a cash-out refinance.

30-Year vs. 15-Year Mortgage: Use Our Mortgage Calculator

Use our mortgage calculator to look at what choosing a shorter repayment period will look like for your budget.

15-Year Vs. 30-Year Mortgage: By The Numbers

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 $400,000 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 $40,000. That means the amount you have to repay on your loan is $360,000. 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 assumed interest rates of 5.66% for a 30-year loan and 4.98% 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.

*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.

Refinance Your Mortgage Loan

Your mortgage may feel like a permanent fixture of your adult life, but the loan itself is easily refinanced if you qualify and decide it’s financially advantageous for you to do so. You can select a shorter repayment period at that time, when your income increases. For example, if you start out with a 30-year mortgage, you can refinance 5 years later into a 15-year mortgage and reap most of the savings while sparing yourself the financial burden of a 15-year repayment before you get a handle on your new homeownership budget.

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 5.5% 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 that doing so could increase your monthly payment.

Mortgage Recast

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.

Some mortgage investors don’t offer this option and there may be a fee. Speak with your servicer.

Additional Payments

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. Otherwise, it may be applied to future payments.

Biweekly Payments

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 homes 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.

Ready to take that first step toward owning your home? Apply online now and start looking for your next home. You can also give us a call at (833) 230-4553.