15 year versus 30 year mortgage: knowing how to choose

Battle of the Mortgages 15 year versus 30 yearKJ: 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?

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4 thoughts on “15 year versus 30 year mortgage: knowing how to choose

  1. My wife and I are currently paying our 30 year mortgage like a 15. Sometimes we can go for months without issue and other times we have to cut back to our regular payment to handle a car repair or house repair. I love doing this BECAUSE it’s flexible and we can kill interest at the same time.

    • I agree that it offers the best of both worlds by giving you the most flexibility for when an unanticipated expense (car or home as you mentioned) comes up. Thank you for sharing!

  2. We have a combo approach. We get a 30-year mortgage, which we pay like a 15-year, but our goal is to pay regular payments (interest and principal) so we are one year ahead, then make the extra payments go only to principal. That way, we have a one-year cushion in case we lose a job and want to go a few months or so without making a payment. It feels like we’re not sinking that extra payment into something that we’ll never recover until we sell the house. And, it’s a psychological boost to see that your next mortgage payment isn’t really due for a year!

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