Point of Interest
Choosing between a 15-year and 30-year mortgage depends on how large of a payment you feel comfortable making each month. While a 15-year mortgage will save you tens of thousands in interest, you’ll have to contend with a higher monthly payment — which could be out of reach for some buyers.
Buying a home will likely be the largest purchase you make in life. If you’re trying to decide on the loan term that makes sense for you, using a 15-year vs. 30-year mortgage calculator will help you make the smartest choice for your mortgage term. You won’t find a one-size-fits-all answer to the debate between 15-year and 30-year mortgages. Each has its own benefits and drawbacks, and you’ll have to weigh them for yourself based on your financial goals.
A mortgage calculator to help you understand your options when choosing a mortgage term for your new home, so you should take advantage of this tool and the other information available to help make a decision.
15- vs. 30-year mortgage
The difference between a 15-year mortgage and a 30-year mortgage seems pretty straightforward — it takes you twice as long to pay off your loan with a 30-year loan vs. a 15-year loan, which is half the term of the former. But it isn’t that simple — ultimately, the math behind each loan type can help you get a clear picture of everything from your monthly payment to the amount of interest you pay and how quickly you build equity in your home.
The effects of amortization
Amortization is the accounting term for paying off a debt over time with fixed monthly payments. It determines the mix of interest and principal in every monthly payment. At first, a big chunk of your fixed monthly payment will go to interest. But, over time, the principal portion will get bigger until nearly all of your payment goes to principal rather than interest.
For a 15-year mortgage, your bank will use a 15-year mortgage rates calculator to figure out your monthly payments. It divides your interest rate by 12 to get your monthly rate and then multiplies it by your remaining principal each month to calculate how much interest you owe. It also calculates how much principal you need to pay down each month to get your balance to zero in 15 years. As your balance goes down, so will your interest payments, allowing even more of your fixed monthly payment to go to the principal.
The calculations for 30-year loans work the same way. The difference is, though, that with 30-year loans, a calculator will show that you’ll be paying interest for longer before you start knocking down your principal. This means it takes longer to build equity in a 30-year mortgage.
Tip: A mortgage calculator will show you the amortization schedule for each loan you calculate so you can see how the principal and interest change over time.
15-year mortgage options
If you want the lowest interest possible, consider a 15-year fixed-rate mortgage. The average interest rate for a 15-year loan was 2.86% as of June 22, 2020. Mortgage rates are near record lows right now for all loan types, making it a great time to buy a home or refinance your current loan.
The biggest benefit of choosing a 15-year mortgage is its low interest rate. According to historical mortgage data from Freddie Mac, 15-year loans almost always come with a lower rate than their 30-year counterparts. Choosing a loan with a lower interest rate means more money in your pocket over time.
However, 15-year loans do come with higher monthly payments, which may make you think twice before choosing this option over a 30-year loan. You can see the difference when using a 15-year mortgage calculator to figure out your monthly payment and total interest over the life of the loan. Take, for example, the following scenario:
- Home price: $200,000
- Down payment: $20,000 (10%)
- Mortgage principal: $180,000
- Interest rate: 2.86%
With this example, your monthly payment would be $1,230 for principal and interest. It would take you 25 payments to get to 20% equity in your home so you can stop paying for mortgage insurance. Over the life of your loan, you’d pay $41,616.09 in interest, which is 20.8% of your home’s value.
Tip: Many banks will offer 10- and 20-year terms along with the standard 15-year and 30-year mortgage options.
30-year mortgage options
The staple of American home buying has always been the 30-year conventional mortgage. This mortgage option gives you a lower monthly payment but you will have to pay significantly more in interest over the life of your loan. The interest rates for 30-year mortgages are slightly higher than 15-year loans at 3.40% on average as of June 22, 2020.
With a 30-year loan, it will take you much longer to reach major milestones along the way. For the first several years, a significant portion of your monthly payment will go to interest alone, making it more difficult to build up equity.
You’ll see the difference in a 15-year vs. 30-year mortgage when comparing the costs of the same house from the example above.
- Home price: $200,000.
- Down payment: $20,000 (10%).
- Mortgage principal: $180,000.
- Interest rate: 3.41%.
In this situation, your monthly payment would be $799 for principal and interest, but it would take you 64 months to reach 20% equity so you can get rid of private mortgage insurance — compared to only 25 months for a 15-year loan. You’ll end up paying $107,805.61 (54% of the purchase price) in total interest compared to only 20.8% of the price for a 15-year mortgage.
Pro tip: Making extra principal payments early on will help you build equity faster and dramatically lower your total interest paid.
|Mortgage type||Average rates||Required down payment||Monthly principal + interest for $200,000 loan at the average interest rate|
|15-year fixed||2.860%||At least 3% of the purchase price||$1,230|
|30-year fixed||3.41%||As low as 0% of the purchase price for some loan types||$799|
Should I always take a 15-year mortgage if I can afford it?
A 15-year mortgage will make the most sense for nearly everyone who can afford it. You’ll build equity faster, be mortgage-free sooner and save tens of thousands of dollars in interest while you’re paying off the loan.
You should also consider a few other opportunities that make a 30-year loan more attractive, too. First, having a lower monthly payment gives you greater financial flexibility. While you’re paying on the loan over a longer period, you’ll have more cash every month that you can save, invest or simply use to enjoy life.
You can also opt to make additional principal payments on a 30-year loan to mimic a 15-year amortization schedule, giving you the flexibility to fall back to the lower 30-year payment if you lose income or want to save for a big purchase coming up.
The final word
Choosing between a 15- and 30-year mortgage is a difficult — and extremely personal — decision. Only you can decide how comfortable you are with a larger monthly payment or with paying significantly more interest over the life of your loan. To help you decide, you can use a 15-year vs. 30-year mortgage calculator to help you determine exactly how much you can spend on a house with each loan type while still staying within your comfort zone.