3 minute read

When obtaining financing, many soon-to-be-homeowners are faced with the dilemma: Should I opt for a 15-year mortgage or a 30-year mortgage?

Well, there are pros and cons to both.  And ultimately, it’s up to you to decide what’s best for you and your personal situation.  Let’s dive in a take a look at some different scenarios.

A 30-year mortgage can give you a low monthly payment and maximize your monthly cashflow

30-year mortgages typically come with a lower monthly payment and a higher interest rate than 15-year mortgages.  What does this mean?  Over the course of your loan, you will actually be paying more money in the end, but for the short-term, you’ll have more money in your pocket each month.

For example, if you borrowed $300,000 using a 30-Year Fixed Rate mortgage (at 4.69%), your monthly payment would be approximately $1,554.11 per month.  Meanwhile, with a 15-Year Fixed Rate mortgage (at 4.14%), your monthly payment would be closer to $2,240.17 per month.

If you went with a 30-year loan in the scenario above, this would leave you with an extra $686.06 per month.  So, what could you do with this extra money each month?  Well, you could do a lot of things including:

  • Save the cash for a downpayment on an investment property
  • Use the cash to invest in index funds
  • Contribute towards your kids’ 529 Plan
  • Buy a bigger house
  • Purchase that pony you’ve been eyeing since you were a kid

What are the benefits to a 15-year mortgage?

There are a couple of benefits to a 15-Year Fixed Rate Mortgage, including:

  • You get a lower interest rate
  • You pay of your home twice as fast, which enables you to pay off debt quicker
  • You end up saving a LOT of money in interest over time

How much can I really save with a 15-year mortgage?

So, how much money could you hypothetically save in interest?  Well, let’s take the same scenario above and compare a 15-year Fixed Rate Mortgage with a 30-year Fixed Rate Mortgage:

Loan TypeLoan AmountInterest RateMonthly Payment# of PaymentsTotal InterestTotal Cost
30-Year Fixed$300,0004.69%$1,554.11360$259,480.41$559,480.41
15-Year Fixed$300,0004.14%$2,240.17180$103,230.57$403,230.57

As you can see, the loan amount is the same.  But, with the higher interest rate and low payments on the 30-Year Fixed Rate mortgage, you end up paying an extra $156,249.84 in interest over the course of the loan!  In the long term, a 30-year mortgage ends up being a much more expensive loan when compared to the 15-year loan.

So, which one should I choose?

The choice is up to you.  Each person and their financial situations are different.  To some people, it may make sense to choose the 30-year mortgage, while to others the 15-year makes more sense.  Here are a couple of things you can consider when deciding which choice is best for you:

  • How does a 15-year or 30-year mortgage impact my short-term goals?
  • How does a 15-year or 30-year mortgage impact my long-term goals?
  • If choose a 30-year mortgage, what can I do with the difference in the monthly payment (assuming I can make up the difference).
  • What are my current priorities as it relates to my family?
  • What does my spouse think?

As always, when making such an important decision, it’s a great idea to also discuss these ideas with your financial planner or your mortgage lender.