15 vs. 30 year fixed-rate mortgage: which is right for you?
If you're thinking of applying for a fixed-rate mortgage, you need to decide on a loan "term" to go with it. A loan's term is the length of time that you will spend repaying the loan. It influences how much you'll pay each month, including interest, and it defines how long it will be until you'll own the home outright. Fixed-rate mortgages typically come with 15 or 30-year loan terms—although, some lenders offer 10 and 20-year loan terms as well. Let's go over the advantages and disadvantages of each option before you apply.
30 year mortgages
Your installments will be lower
If you borrow a total of $250,000, you will pay less per month over the course of 30 years (360 months) than you would over 15 years (180 months). However, it’s unlikely that your monthly payment will be exactly half of a 15-year loan, due to differing interest rates. 30-year fixed rate mortgages are advantageous for homeowners with higher existing monthly debt payments. Lower monthly payments mean that you have more cash left over for other expenses.
Your interest rates are higher
Just because you pay less on a month-to-month basis, does not mean you will pay less overall. In fact, it’s the opposite: you will pay more in a 30-year fixed-rate mortgage than you will in a 15-year loan—thanks to interest. Since the repayment period in a 30-year fixed-rate mortgage is longer than its 15-year counterpart, lenders charge higher interest rates to mitigate the increased risk of default.
Additionally, even if interest rates between a 15- and a 30-year fixed-rate mortgage were the same, the latter would accrue more interest, due to the longer term over which interest can accrue. If you want to pay less in the long run and can afford a higher monthly payment, then a 30-year loan might not be for you.
You can (maybe) afford more home
The amount you qualify to borrow depends on several factors, including your credit score, debt-to-income ratio, loan-to-value ratio, and more. If you are comfortable in all of these categories, you might be able to buy more home with a 30-year loan vs. a 15-year loan. That’s because, if you can afford equal monthly payments, the former would enable you to take out a larger loan.
You’ll have more monthly disposable income for other goals
Having lower payments ensures that you have more monthly income to put toward other expenses, such as utilities, car payments, and insurance. You’ll also have more cash on hand to put toward the various financial goals that you have in the short term. Would you like to renovate your new home sooner rather than later? Do you or your child hope to attend college in the near future? Lower monthly payments can help you afford goals that can’t wait until after your mortgage is paid off.
15 year mortgages
You will pay off the loan faster
One of the advantages of a 15-year fixed-rate mortgage is that you’ll pay it off faster. You’ll pay higher monthly payments in exchange for a shorter loan term, and because your lender considers it a less risky loan (due to a shorter period for them to recoup their money) they will typically offer a lower interest rate.
15-year fixed-rate mortgages are beneficial if you can afford a higher monthly payment alongside your other expenses. They’re also practical if you want to save money in the long run, due to a significant lack of accrued interest compared to a 30-year mortgage.
You build equity faster
“Home equity” is the amount of your mortgage that you’ve repaid, compared to your remaining balance; often expressed as a percentage. In other words, equity is the proportion of your property you actually own; you only own a portion of your property until you’ve paid off the entire loan.
Paying higher monthly installments lets you build equity faster, because more money goes towards the principal—the original amount you borrowed—instead of interest. Sure, you have lower monthly payments with a 30-year fixed-rate mortgage, but you pay a higher percentage of monthly interest. That means that it costs more and takes longer to build equity in your home with a 30-year fixed-rate mortgage than it does with a 15-year fixed-rate mortgage.
You will pay fewer fees
15-year fixed-mortgages are exempt from the loan-level price adjustments (LLPAs) that Fannie Mae and Freddie Mac charge some borrowers for a 30-year fixed-rate mortgage. Born out of the 2008 financial crisis to protect lenders from riskier loans, LLPAs add up throughout 30-year fixed-rate mortgages—making them more expensive compared to a 15-year mortgage. Typically, borrowers with lower credit scores or those who put less down must have LLPAs.
Likewise, the Federal Housing Administration charges higher insurance premiums on 30-year mortgages compared to 15-year mortgages. 15-year mortgages traditionally have lower premiums, and some loan-level price adjustments don’t exist on 15-year loans at all. You’ll pay fewer fees with a 15-year mortgage, saving you more money versus a 30-year mortgage.
You’ll have lower tax deductions
The amount of money you pay in interest is often tax deductible (as long as it’s for your primary or secondary residence, among other requirements). As such, borrowers can typically claim higher tax deductions for payments made toward 30-year mortgages, because more money goes towards the principal than interest in 15-year mortgages. With lower tax deductions from a 15-year mortgage, you'll end up paying more in taxes than with a 30-year mortgage.
Deciding between a 15 and 30 year fixed rate mortgage
30 and 15-year fixed-rate mortgages each have their pros and cons. 30-year fixed-rate mortgages are more common because many people prefer lower monthly payments to make space for additional expenses while working toward other financial goals. However, this route ultimately results in paying more to borrow the initial loan amount. 15-year fixed-rate mortgages allow less breathing room, but they also cost less overall.
If you’re struggling to make a decision between the 2 options, keep in mind that you may have some amount of flexibility after you sign. For example, if you opt for a 30-year fixed-rate mortgage, you can always pay more than your required monthly statement and pay off more in principal—assuming that there is no restriction preventing you from doing so. This option allows you to pay off your loan faster but resort back to paying only what you owe if you fall on hard times or want to reduce your monthly expenses.
Deciding between a 15 or 30-year fixed-rate mortgage is an important decision, so weigh your options carefully and consider what works best for your monthly budget. Get your personalized rates with Better Mortgage, and discover what a 15-year vs. 30-year mortgage will cost you over the life of the loan.