Should You Get a 30-Year or 15-Year Mortgage?

Most mortgages come with repayment schedules of either 15 or 30 years, with most borrowers opting for 30-year terms. However, a 15-year mortgage is actually the better option if you're aiming to minimize the total amount of interest you pay. While monthly payments on a 15-year mortgage are higher, they actually represent a better value when you consider the overall costs.

Who Should Get a 30 vs. 15 Year Mortgage?

15-year mortgages are always preferable if you can afford the high monthly payments, but practically speaking this never includes every person looking to purchase a home.

30-Year Mortgages are Best For…15-Year Mortgages are Best For…
  • Borrowers who want to minimize monthly payments
  • People who want to buy as much "house" as possible
  • People who want to own their homes more quickly
  • Borrowers who want to reduce the lifetime costs of interest

Most people choose 30-year mortgages because they offer a good balance between monthly costs and the size of the home you can afford. However, borrowers who are willing to scale back on square footage can end up saving thousands of dollars on their loan by taking on a 15-year mortgage. While the monthly costs may be higher, this option benefits people who want to own their homes as fast as possible. The choice between a 15-year mortgage and 30-year mortgage comes down to how much and how long you want to pay for the money you borrow.

Interest Rates for 15 and 30 Year Mortgages

If you apply for rate estimates on a 15-year mortgage, rates will generally be lower than those you would get on a 30-year mortgage using the same borrower information. Historically, the difference between the average mortgage rates for the two terms has been between 0.7% and 0.8%.

Monthly US Averages For Fixed Rate Mortgages, 2016-2017

15-Year Mortgages30-Year Mortgages
Jun 20162.78%3.48%
Jul 20162.78%3.48%
Aug 20162.74%3.43%
Sep 20162.72%3.42%
Oct 20162.78%3.47%
Nov 20163.25%4.03%
Dec 20163.55%4.32%
Jan 20173.40%4.19%
Feb 20173.37%4.16%
Mar 20173.39%4.14%
Apr 20173.27%4.03%
May 20173.19%3.95%
Jun 20173.17%3.90%

Since 30-year mortgages currently average around 4%, it's likely that you'll find 15-year terms getting estimates of 3.2% or 3.3% based on the same loan amounts and borrower details. Based on these averages, a borrower taking out a $200,000 mortgage would save over $91,000 in lifetime interest payments with a 15-year mortgage compared to a longer 30-year mortgage. However, the $955 monthly payment on the 30-year mortgage would be much easier to manage than the $1,400 monthly costs of a 15-year amortization.

Calculating the Difference Between 15 and 30 Year Mortgages

To determine the monetary difference between 15 and 30 year mortgages, we can compare the monthly mortgage payments and total costs of two fixed rate mortgages for $200,000. If we use the most recent national averages for each mortgage type, you would pay $454 more each month with a 15-year mortgage but save over $88,000.

15-Year Mortgage30-Year MortgageDifference
Loan Amount$200,000$200,000-
Interest Rate3.17%3.90%73 basis points
Monthly Principal and Interest$1,397.57$943.34$454.23
Total Interest Paid$51,563.65$139,601.11$88,037.76

This means that the lifetime expenses of a 30-year, $200,000 mortgage are more than two and a half times the cost of a 15-year mortgage with the same amount. In addition, 15-year mortgages generally have lower interest rates than 30-year mortgages, which drives down the costs of interest even further. The higher the interest rate, the more you'll save with a shorter mortgage. However, people who simply want to buy the biggest house they can afford should stick with the lower payments on a 30-year mortgage.

Making extra payments on a 30-year mortgage is one way to get the best of both worlds. If you make enough extra payments, you could pay off your mortgage within 15 years without the mandatory payments of an actual 15-year mortgage. Of course, this plan gives up the tax deductions you earn on the portion you pay towards mortgage interest on a primary home, making it less efficient compared to a true 15-year mortgage. Nevertheless, having extra payments as an optional cost may be well worth it if your monthly income could suddenly change.

Sources

FRED® Economic Research, Federal Reserve Bank of St. Louis

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