Pros and Cons of the 15 vs 30 Year Mortgage

15 vs 30 year mortgageUntil about 2005, I never realized there were any mortgage terms other than 30 years. In addition to the fact that I’d never been in the market for a house prior to 2005, there were some excellent reasons for my ignorance.

First of all, the 30-year mortgage came into being after the Great Depression—prior to that, shorter-term mortgages were the norm. For many years after, a 30-year term was basically the only option available to American homebuyers.

Add to that the fact that for a long time, 15-year mortgages only offered slight interest rate improvements, which made them less-than-tempting to borrowers who would have to take on higher monthly payments. It’s no wonder that 15-year mortgages sounded somewhat exotic to the average borrower not that long ago.

But interest rates are now low enough to make the 15-year fixed rate mortgage look pretty darn desirable—both for new homebuyers and people looking to refinance. Here are some of the considerations to think about when deciding between a 30-year and a 15-year mortgage:

Don’t Misuse the 30-Year Mortgage

One of the benefits of the 30-year mortgage is that it keeps monthly payments lower, making home ownership (and larger homes) within the reach of the average home buyer . Unfortunately, for many years prior to the housing collapse, that benefit was misused, in that it allowed buyers to purchase far more home than they could truly afford.

A good rule of thumb to keep your price range reasonable is to only look at houses that you could afford even with a 15-year mortgage. That way, you have the flexibility to decide whether you would prefer to build equity and pay off your mortgage sooner, or keep more of your money liquid for other investments and uses.

Home ownership is such a big part of the American Dream that we can forget (and did forget, prior to 2008) how foolish it is to be house-poor. It’s important to remember that the 30-year mortgage term is a tool for your budget, not a method to overreach your grasp.

What Are Your Long-Term Plans?

If you know that you will need to sell your home within five years of buying it, an argument can be made for both the 15-year and the 30-year term. With the 15-year mortgage, you’ll have more equity available when you sell, but you’ll spend more each month on a house you don’t plan to stay in forever. On the other hand, there is something to be said for keeping your monthly housing payments lower while you are planning your future move, as it will allow you more flexibility. Basically, if you know your home will be a short-term house, you’ll need to decide if the equity later is more or less important than extra money in your budget now.

Similar arguments can be made for each loan term if you are planning on buying a forever home. The 30-year mortgage can give you the financial leeway to buy a larger house you can grow into or buy a more modest home that you plan to renovate into your dream house. But having the mortgage paid off in 15 years means you’ll have a great deal more financial freedom sooner—potentially in time for kids to go to college or to amp up retirement savings and investments in the latter half of your career.

Knowing both your long-term housing and financial plans can help you determine when and how much wiggle room you will need in your monthly budget—which can help you decide which loan term is right for you.

Check out this video which shows the difference in interest payments overtime by using a 15 vs 30 year mortgage…

What About Taxes?

A common argument against the 15-year mortgage has to do with the tax break on mortgage interest. Since the size of your tax break depends on the amount of interest you have paid, you’ll save more in taxes each year when paying a 30-year mortgage—because you’re paying more in interest. However, making a decision on your mortgage term based on these tax issues is like deciding what car to buy based on the cup holders. It should be a perk that you get a tax break, not a deciding factor.

Just to give you some numbers: If you were to borrow $150,000 at 3.4% for 30 years (roughly the current rate as of when this article was written), you would pay $239,000 total on your loan, with nearly $90,000 in interest. During those 30 years, if you are in the 25% marginal tax bracket, you will save approximately $22,000 in taxes—or $745 per year.

Borrowing the same amount at 2.61% for 15 years, you would pay just over $191,000, with approximately $41,000 paid in interest. While you’ll only save $10,400 in taxes over that term (about $695 per year), remember that the yearly tax savings is only $50 less than the 30-year option.

That’s hardly worth mentioning, let alone basing your loan decision on.

Paying Ahead on the 30-Year Mortgage

One happy medium that allows homebuyers a little more control over their budgets is to take out a traditional 30-year fixed rate loan but send double payments every month in order to shorten their loan and lower their overall interest. This allows families to only pay the required amount during lean months but still reap the benefits of building equity and paying less in interest when they can afford to pay extra.

If you have the discipline to pay ahead on your mortgage, this can be a good solution that gives you the best of both worlds. Although your interest will be slightly higher than a 15-year mortgage, you will still save a great deal in interest over the 30-year schedule. Odds are though, you won’t stick to consistently making extra payments.

The Bottom Line on the 15 vs 30 Year Mortgage

With the current rock-bottom interest rates, now is an excellent time to look into a 15-year loan. And these loans are certainly gaining in popularity—even though 80% of new home loans are still the traditional 30-year fixed rate mortgage. While the advantages of a 15-year loan do not necessarily outweigh the costs for all homebuyers, those with good credit and the ability to take on higher monthly mortgage payments will find that a shorter term can make financial sense.

Already have a mortgage? What did you decide to do when looking at a 15 vs 30 year mortgage? Share your thoughts in the comment section below.

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Last Edited: June 23, 2014 @ 10:29 am
About Emily Guy Birken

Emily Guy Birken is a former English teacher, and an excellent freelance writer. She's also a stay-at-home-mom. She resides in Lafayette, IN, with her engineer husband and son. Emily's thoughts on parenting and life in general are found at The SAHMnambulist.

Comments

  1. And don’t forget that for many couples borrowing $150K for a house, they won’t accumulate enough in interest payments with either a 15 year or a 30 year mortgage to overcome the standard deduction hurdle and be able to itemize their tax deductions.  So the tax benefit for either mortgage in that case is a big fat $0.

    • Plantingourpennies Excellent point. The mortgage interest deduction isn’t a guarantee by any means. As they say, don’t let the tail wag the dog.

  2. This is a great description.  My wife and I are planning to move relatively soon and are going to have to make this decision.  What we will probably end up doing is get a 30 year mortgage in order to have the flexibility each month, but then throw extra at the mortgage when we have some saved up.  At around 3.5%, it makes more sense to invest the money than pay down the mortgage (if you’re not too risk averse).

  3. krantcents1 says:

    When I refinanced roughly 10-11 years ago, I knew I wanted my mortgage paid off by the time I retired.  I went with a 15 year mortgage because I could handle the higher payment.  I am accelerating my payments to insure I have it paid off by the time I retire.

  4. I went for a 30 year both times. With interest rates as low as they are I wanted to lock them in for as long as possible.

    • Money Life and More That’s a good way of thinking about it. I can only imagine that 3% money will be hard to come by in the near future.

  5. Hm… I think the one big thing for me is that I can turn a 30-year mortgage into a 15-year mortgage by paying more, but if I lose my job or run into unforeseen health problems, I can’t turn that 15-year mortgage into a 30-year mortgage.

  6. For the average person where I live, a 15 yr mortgage can be a challenge. I get your points about the numbers, and staying within your means. But if I had to wait for a house I could afford with a 15 yr mortgage, well, I’d still be waiting. It’s sad, and I wish things were different, but that’s life living in one of the most expensive counties in the US.

  7. joetaxpayer says:

    I never tire of the 15 vs 30 year discussion. There are so many aspects of this to look at. 
    First, for a new loan, using 4% at 30 year, 3.5% at 15, the different in payment is 50%. Ironically, when the 30 year rate was 14% (in 1985) I went 15 year to get a 13.5% rate at just a 10% higher payment. So as rates drop the delta becomes a tougher one to overcome. 
    Next, when people say ‘with rates so low go 15′ I’d suggest the opposite, this is the cheapest money you’ll ever see, the cost is near zero after inflation. A fixed 4% when most of my life CDs were yielding 5-8% sounds good. 
    Last, people’s saving rate is horrific. They should be taking the difference and getting a match in their 401(k) and make sure they have zero other debt. They should build their emergency fund and save beyond that. A new house is an unknown. People can read all they want, and I hope they do, but it takes years of being in that house to see the costs it brings. New furnace/AC/HVAC? That was a $12,000 bill. Paint the house? $2000.
    In my opinion, cash is important, and using it to pay the mortgage early is a big commitment, 15 years you give up those monthly dollars. In a perfect world, the mortgage would offer a provision to borrow back, so your balance had to drop at the 30 year amortization, but if you pay at the 15 year rate, you are building a reserve you could borrow from. That doesn’t exist, yet. I think the goal of ‘no mortgage’ is great, but until it’s zero, there’s still a monthly payment due. The 30 gives flexibility, and as debtblag said below, if you have extra cash, then you can prepay.