If you’re buying a home, one thing you should know is that not all mortgages are created equal. Different mortgage lenders offer different rates. The length of your repayment period will also affect your mortgage rate. This is why you may be torn between a 15-year mortgage and a 30-year mortgage. Each offers its own benefits and drawbacks, so let’s explore.
Pros and cons of a 15-year mortgage
With a 15-year mortgage, you’ll repay your home loan in half the time it would take to repay it under a 30-year loan. That means your monthly payments will be higher on an individual basis, but you’ll also save money overall on mortgage interest for two reasons:
1. A shorter repayment period
2. A lower interest rate on your loan
If you can afford those higher monthly payments, a 15-year loan may be worth it. But if you can’t manage a higher monthly payment, then stretching your budget to keep up with a 15-year loan could put you in a position where you risk falling behind on your mortgage, and so pave the way to foreclosure. Ouch.
Furthermore, don’t forget that when you take on higher monthly payments, you lose out on the opportunity to do other things with that money. A 15-year mortgage could, therefore, make it more difficult for you to consistently fund a retirement plan or save for college. But on the flipside, you’ll be done with those payments sooner than you would be with a 30-year loan. So while you may need to put other goals on hold in the near term, you’ll then have an opportunity to catch up once your home is paid off.
Pros and cons of a 30-year mortgage
With a 30-year mortgage, your monthly payments will be lower than with a 15-year loan, which makes those payments more easily fit into your budget. On the other hand, you’ll pay more interest over the life of your loan because you’ll have:
1. A longer repayment period
2. A higher interest rate attached to your loan
Many people can’t afford the higher monthly payments that come with 15-year loans, so if that’s the case for you, a 30-year mortgage could be your ticket to homeownership sooner rather than later. Just be aware that you’ll be paying off that home loan for a very, very long time.
Running the numbers
In order to really understand the difference between a 15- and 30-year mortgage, it pays to crunch some numbers and see what financial impact each option will have. You can use our mortgage calculator to look at the impact of different interest rates and loan terms. Below, we’ll go through an example of how to look at these numbers without the mortgage calculator’s help.
On June 18, 2020, the average mortgage rate for a 30-year fixed loan was 3.5%. For a 15-year loan, it was 2.87%. That’s quite a difference in interest rate.
Now, let’s see what that means in terms of a monthly payment. Imagine you’re taking out a $200,000 loan with a 30-year term and an interest rate of 3.5%. Your monthly payment will be $1,457, but you’ll also pay a total of $123,336.72 in interest over the life of that loan.
On the other hand, if you take out a $200,000 loan with a 15-year term and an interest rate of 2.87%, your monthly payment will be $1,927. That’s a lot higher than your monthly payment with a 30-year loan. But over the life of your loan, you’ll spend just $43,395.65 on interest — roughly one-third of the interest you’ll pay on a 30-year loan.
Even if we apply the same interest rate to a 15- and 30-year loan, you’ll see that the numbers work out similarly. We’ve seen what a 3.5% interest rate means for a 30-year loan. If we apply it to a 15-year loan, that monthly payment goes up to $1,988, and total interest paid climbs to $57,400.82. That’s still a huge difference on both counts.
Therefore, if you’re not sure what mortgage to get, you may want to ask yourself: How much of a monthly payment can I afford? If you can swing a higher one, a 15-year mortgage will save you a lot of money over time. But if you can’t pull off that higher monthly payment, then a 30-year mortgage is the way to go.