If you have decided to purchase a house using a mortgage, you need to be aware that not all mortgage terms are the same. Each mortgage comes with its specific interest rate and loan repayment period.

When applying for a mortgage, one of the significant decisions you must make from the onset is deciding what mortgage term – 15-year or 30-year – is suitable for you. This decision comes down to your preference between lower overall costs versus lower monthly payments. There is no right or wrong answer; the key is finding what suits your short- and long-term financial situation.

The Difference Between 15-Year And 30-Year Mortgage

Below are two major terms you must know to effectively understand the differences between the 15-year and 30-year mortgage repayment periods.

Principal: The amount you borrowed and have to pay back

Interest: The money you pay each month on top of the principal to compensate the lender for giving you the loan

One crucial fact that you must understand is that the principal amount of a mortgage remains the same regardless of the loan repayment term. However, below are some differences between the 15-year and 30-year mortgage.   

15-Year Mortgage	30-Year Mortgage
Higher Monthly Payments	Lower Monthly Payments
Short loan term	Long loan term
Low interest rate	Higher interest rate

With a 15-year mortgage, the higher payments go into paying off your principal amount faster, which means the lender is receiving their money quicker, and reduces the overall interest paid on the loan.

However, for a 30-year mortgage, you are paying a lower monthly payment when compared to a 15-year mortgage but at a higher interest rate. This is because you are compensating the lender for allowing you to borrow the money for a lengthy period.

15-Year Vs. 30-Year Mortgages: How to Calculate Your Loan Payments

Learning how to calculate your potential monthly loan payments regardless of your chosen loan repayment term is essential before looking at houses. It gives you an idea of what to expect in terms of monthly payments.

To determine the actual costs of your loan payments on a 15-year and 30-year mortgage, you’ll need the following information:

• Total cost of the home
• Down payment amount
• Current 15-year and 30-year mortgage rates

Principal and interest are calculated using the purchase price of the home, subtracting the down payment, and then adding the interest rate and loan term. If you have a 15-year mortgage, you will make a total of 180 monthly payments. A 30-year loan will have 360 payments.

To understand the difference between a 15 vs. 30-year mortgage, it pays to crunch some numbers and see what financial impact each option will have.

As of 11th March 2021 (the time of crafting this article), the average mortgage rate for a 30-year fixed loan was 3.46%. For a 15-year loan, it was 2.56%. Quite a massive difference in interest rate when comparing both mortgage repayment periods.

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 period, a 20% down payment, and an interest rate of 3.46%. (You can use an online mortgage calculator to put in your exact principal balance.) Your monthly payment will be $952.80 for principal and interest, but you’ll also pay a total of $97,236.34 in mortgage interest over the life of that loan.

On the other hand, if you take out a $200,000 loan with a 15-year term, the same 20% down payment, and an interest rate of 2.56%, your monthly mortgage payment will be $1309.42 for principal and interest. This is a lot higher than your monthly payment with a 30-year loan. But over the life of your loan, you’ll spend just $32,798 on mortgage interest which is roughly one-third of the interest you’ll pay on a 30-year loan.

Pros and Cons of the 15-Year Mortgage

Opting for a 15-year mortgage comes with several advantages and disadvantages. They include:

Pros

• Allows you to build equity faster
• Refinance easier with a lower loan-to-value ratio
• Enjoy only 15 years of mortgage payments, meaning most borrowers will enjoy a paid-off home long before retirement age
• Spend less in interest payments over the life of the loan, as seen in our example

Cons

• First-time homebuyers may lack the finances to qualify.
• Higher monthly payments leave little extra cash flow for other purchases.
• A higher debt-to-income ratio prevents qualification for other large loans or home purchases.

Pros and Cons of the 30-Year Mortgage

While a 30-year fixed mortgage costs more in interest over the length of the loan, the monthly payments are more affordable. Below are some of the pros and cons associated with the 30-year mortgage.

Pros

• Enjoy lower, more affordable monthly payments
• Free-up cash for savings, retirement, and other needs and expenses
• Still qualify for higher loan amounts

Cons

• Higher interest rate
• The loan balance remains higher for a more extended period
• Spend more on interest over the life of the loan
• Home equity is slow to build
• Making monthly payments over a long period

Which Loan Term Is Right for You?

When deciding between a 15-year or 30-year mortgage, you should carefully evaluate your monthly income, expenses, and job stability. You should opt for a 15-year mortgage if you have a high income, lower debt profile, looking for the best interest rate, or want to purchase a smaller house.

On the other hand, if your income is uncertain or you want to purchase a large property, you should stick to the 30-year mortgage. While the 30-year mortgage has a higher fixed rate, it offers flexibility in that you could always pay an additional amount each month to help pay off the mortgage faster.  

We are not an accountant or financial advisor. All information provided here should be verified and vetted by you, your family, and your financial counsel.