KJ: So you need a mortgage (like most of us out there). If you’ve ever been through the process, then you know that getting a mortgage will subject you to decision after decision after decision. One decision we hope to help you with is understanding if you should consider a 15 year or 30 year mortgage. Here are some key considerations when it comes time for you to make the decision:
You can pay less in interest over the loan’s life
With a mortgage that is an amortizing asset, you pay much more of your payment toward interest in the early years and much more to principal in the later years. And, with a shorter time period offered by a 15 year mortgage, much more of your payment goes toward principal each month. Also, with the shorter-term, you have significantly less interest you pay over the life of the loan. For example, assuming a 4% interest rate and a loan of $150,000, a 30 year mortgage would have you paying a total of $107,000 in interest while a 15 year mortgage would have you paying a total of $49,000. That’s $58,000 in interest savings!
Your payment is not double
The first reaction that most people have is that they cannot afford a 15 year mortgage because it MUST be double what a 30 year mortgage is. I mean, it’s half the time after all! In fact, that’s not the case at all. If you take our previous example of a 4% interest rate, the 15 year mortgage payment is actually 55% more ($1110 per month compared to $716 for the 30 year). Still a bit higher of a payment, but not anywhere near double.
You get a lower interest rate
While the previous examples suggested the interest rate on a 30 year and 15 year mortgage were the same, they often aren’t. It’s not infrequent that you’ll save anywhere from 0.5% to 1% per year on your interest rate to go with the 15 year mortgage. As such, if we continue our example of a 4% 30 year, but instead use a 3.25% rate for a 15 year mortgage, your payments could look like:
- 30 year at 4%: $716
15 year at 3.25%: $1,054
Difference: $338 or 47% higher
So then why not get a 15 year mortgage?
The key answer: you lose budget flexbility. As many learned in the 2008-2009 crisis and the Tech bubble burst, your income is all but certain. So, if you get a 15 year mortgage, you are locking yourself into the higher monthly payment for the remainder of the loan, and when times get tough, the last thing you want is a high fixed expense.
But wait, maybe there’s a happy medium?
An alternative that may be the best of both worlds is to get a 30 year mortgage, but pay it as if it’s a 15 year mortgage. That way, you lock in a lower monthly payment, but you reduce the amount of interest you will pay over the life of the loan because the extra monthly payment will go directly to pay down your principal and thus allow you to shave years off the life of the loan.
If something happens to your job (voluntarily or involuntarily), you aren’t locked into the higher payment, and you can make sure your emergency fund can last even longer to help cover your other essentials that crop up.
- Do you have a 15 or 30 year mortgage?
How did you decide which to pursue?
When comparing a 15 yr versus a 30 yr, would you add anything to this list?
15 year versus 30 year mortgage: knowing how to choose is copyrighted by TheSimpleMoneyBlog.com without consent to republish.
Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.