Making the Choice: 15-Year vs. 30-Year Mortgage
Like many choices in life, there are pros and cons to both sides of the coin. What you’ll probably find, however, is that if you’re strategic in assessing your personal needs, one option will stand out as the clear winner in the end.
The Difference in a Nutshell
So, what’s the real difference between the 15-year mortgage and the 30-year mortgage? In short: overall interest cost. Yes, with the 30-year mortgage, your monthly payments will be smaller . . . but you will pay more in interest over the life of the loan because of how long it takes to pay off. With the 15-year mortgage, however, the interest payment decreases significantly while your overall loan is spread out over fewer payments, causing a higher monthly cost.
If you still aren’t sure which option is right for you, let’s dig deeper:
When it comes to mortgage options, it helps to think of the 15-year fixed-rate mortgage as a sports car: it’ll get you from 0-60 MPH in half the time, but it will be a more intense and cramped ride. If you’re squeezing your entire mortgage into fifteen years of payments, each payment will naturally be twice as much as if you spread it out over thirty years—but, of course, that’s not considering interest payments.
In the first place, a 15-year mortgage doesn’t accrue as much interest, both because the term is shorter and because you begin paying off larger chunks of the principal sooner. In addition, however, banks take less of a risk on a 15-year mortgage, so interest rates also tend to be lower with this payment structure—up to a full percentage point lower!
Overall, this option is the best choice if you are looking to pay down your mortgage quickly (e.g.: if you’re going to want to sell down the road or if you eventually expect a major financial investment, like sending your kids to college). Sure, your finances may be a lot tighter during your payment term, but you’ll unburden yourself of the payments sooner and pay significantly less in interest long term.
If we’re going back to our car analogy, the 30-year fixed-rate is the SUV of the mortgage world. It might take longer to get off the line—and you’ll pay more in gas—but you’ll be able to spread out and enjoy the more comfortable ride.
There is a reason that the 30-year mortgage has become the American standard: it’s accessible. After all, it’s easy to overlook the fact that you’re paying over twice as much in interest over the course of your loan when your monthly payments are hundreds of dollars less. This is why the 30-year fixed-rate mortgage is often the choice of younger homeowners who haven’t established themselves fully in their careers and young families seeking their “forever home” who know they’ll be inhabiting that property for the full life of the loan.
There is also an argument to be made for having the opportunity to invest the difference you’d be paying in college savings or retirement funds. This may make a lot of sense, especially in the case of 401K plans in which your employer will match a percentage of your contribution. It is always important, however, to take into account whether the taxes you’ll pay on those funds renders them less profitable than the money you’d save in interest over the life of your home loan.
Doing the Math
The best way to figure out what will work best for you is often to look at cold, hard numbers.
Let’s say you’re considering a $200,000 loan: realistically, you might be offered a 30-year fixed-rate mortgage at 4% or a 15-year fixed-rate mortgage at 3.25%. In the first case, that means you’ll only be paying $955/month, but you’ll also be paying $143,739 in interest overall. Option B allows you to save over $90,000 in interest overall (your total interest would be $52,961), but you’d also be paying $1,405/month, which might be more than you’re willing (or able) to afford.
Yes, most people would do well to find a way to make the 15-year fixed-rate mortgage work ($90,000 is a lot of money!), but realistically, it’s not doable for everyone. Those with a few kids will usually happily sacrifice the additional interest costs in order to be able to give their family more space or afford a home in a better school district. If you’re planning on retiring soon, however, the extra investment per month will probably make more sense while helping you to prepare for living on a tighter fixed-income.
Bottom line: you have options . . . and speaking with a professional can certainly help you assess which will work best for you. Contact us today if you’re ready to start discussing your own personal pros and cons as you work toward your best mortgage option!