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Mortgages: 15 years vs 30 years

With all the options available today, choosing between mortgages can be overwhelming - the best strategy is to inform yourself, and doing so can be a process. To begin, let’s look at a comparison between two popular mortgage terms: a 15-year mortgage and a 30-year mortgage.

Choosing a 15-year mortgage offers many benefits, the most obvious is that the loan on your house will be paid off in half the time of a 30-year mortgage. The shorter loan length results in higher monthly payment, which can be a drawback for those who are on a tight budget.

On the other hand, this loan type is positive for many individuals, specifically those who are nearing retirement and who do not want to have a mortgage payment in their retirement years. Younger individuals may choose the 15-year mortgage when they wish to pay off their house before their children begin to start college.

A benefit of selecting a 15-year mortgage is that this loan type offers a lower interest rate. Currently, this difference has increased and is hovering around 0.80 percent. The average difference over the last 20 years between a 15-year mortgage interest rate and a 30-year mortgage interest rate is 0.47 percent, according to Freddie Mac.

This significant interest rate difference, coupled with the shorter loan term, means a huge total savings in interest paid over the life of a loan. For example, a $200,000 15-year loan at 3.75% interest would yield $61,800 paid in total interest. In comparison, a 30-year loan for the same amount at 4.25% interest would yield $154,197 paid in total interest ($107,884 of which is paid in the first 15 years). The savings in interest over the life of the loan are even greater. What does this mean? A potential savings of over $92,000.00 for those who are able to use the 15-year loan.

Though the 15-year loan has a higher monthly payment, the savings in the end can be worth the effort of budgeting for this option, when possible.

Alternatively, selecting a 30-year mortgage may offer benefits to home buyers who are dealing with a different set of circumstances. Despite the higher interest rate (when compared to a 15- year loan), the monthly payment is significantly lower that a 15-year loan, due to the longer loan length. This allows more fluidity in the flow of family funds, for savings or retirement, and overall is a more “budget friendly” approach. The lower monthly obligation payment gives the homeowner more control over their mortgage: for example, the homeowner has the option to pay additional principal each monthwhen they are able, but retains the option to pay the minimum payment when other more pressing financial obligations surface.

A drawback of choosing a 30-year mortgage is that the total amount spent on interest is significantly higher over the life of the loan, as noted above.

When considering the long-term financial ‘snapshot’ of total interest paid, be sure to factor in two important factors: the tax advantages of homeownership, as well as keeping inflation at bay.

As the years go by, factoring in inflation, the dollars spent each month on the mortgage payment will become worth less and less. For example, $1,000 today will be worth far less in 20 years time. When a homeowner has a fixed rate mortgage, monthly home mortgage payments do not increase, despite inflation. In other words, the housing payment always remains the same.

The decision as to which home loan type is best for you and your current sit- uation is a decision that must include many factors. Talk to your mortgage professional about loan types and terms, and ask for guidance to achieve the wisest financial decision for you and your family over the long run. Remember, each situation is unique.