What Term is Best for You: 15 vs 30 Year Mortgage
How long should your mortgage term be? That’s an important question to ask because it will determine both the size of your monthly mortgage payment and how quickly you will build equity in your new home.
At SIRVA Mortgage, we often get asked about the differences between shorter and longer mortgage terms and how they will impact home buying decisions. We believe it’s important for buyers to understand the benefits and risks of 15- and 30-year mortgages, so they can make an informed decision about which term is best suited to their needs.
Mortgage Terms and What They Mean
The term of your mortgage is the length of time it will take you to pay both the principal balance and the interest in their entirety. The loan term you choose affects your monthly payment and the amount of interest you’ll pay over the term of your mortgage.
There are three term lengths that are typically offered by mortgage lenders.
- 30-Year Mortgage. A 30-year mortgage is the most common term for mortgages because it offers the lowest and most affordable monthly mortgage payment. The mortgage payment is a fixed amount amortized over 30 years, or 360 monthly payments.
- 20-Year Mortgage. A 20-year mortgage is attractive to some home buyers because it allows them to build equity more quickly than a 30-year mortgage would while keeping their monthly mortgage payment reasonably affordable.
- 15-Year Mortgage. A 15-year mortgage is the cuts the amortization period in half, compared to the 30-year term, requiring only 180 monthly payments to be paid in full.
When you choose a term shorter than 30 years, the interest rates are lower, but you are trading higher monthly payments for lower total costs. You will build equity far more quickly with a 15-year loan term than you would with a 30-year term. You will also save money on your total interest.
What Are the Benefits and Risks of a 30-Year Mortgage?
30-year mortgages are popular for a reason, but that doesn't mean there aren't some downsides to consider before you get one. Here are the benefits and risks as we see them.
Benefits of a 30-Year Mortgage
Let's review the benefits and advantages of a 30-year mortgage.
- Lower monthly payments. Arguably the biggest benefit of a 30-year mortgage is that your monthly payment will be lower than it would if you opted for a shorter loan term.
- Flexibility. With a 30-year term, you have the flexibility of adding an additional amount in your monthly payment toward the principal of your loan to shorten the term of your loan without being legally obligated for the shorter-term payments.
- Home affordability. By spreading your loan payments out over 30 years, you may be able to afford a more expensive or bigger home than you would if you had a shorter term.
- Easier to qualify. In many cases, it is easier to qualify for a 30-year mortgage than it is to qualify for a mortgage with a shorter amortization period.
These advantages make a 30-year mortgage the most popular option among home buyers.
Risks of a 30-Year Mortgage
Now, let's review some of the potential risks associated with a 30-year mortgage.
- Higher interest rates. As a rule, the interest rates for 30-year loans tend to be higher than they are for shorter terms because the lender's interest rate risk is elevated.
- More total interest paid. Even without a higher interest rate, you will pay more in total interest over the term of a 30-year loan than you would with a 15-year loan because interest compounds daily.
- Danger of overborrowing. Sometimes, borrowers buy a more expensive house with a 30-year mortgage than they would with a shorter term because the payments are lower. That can cause issues with related expenses such as property taxes and maintenance.
You'll need to weigh these risks against the benefits of a 30-year mortgage when choosing a mortgage term.
What Are the Benefits and Risks of a 15-Year Mortgage?
Now, let's look at the benefits and risks of choosing a 15-year mortgage.
Benefits of a 15-Year Mortgage
When it comes to saving money, there are some significant benefits to opting for a 15-year mortgage.
- Lower interest rates. In most cases, your mortgage lender will offer a lower rate for a shorter-term mortgage. That's because their interest rate risk is lower and they'll be paid back more quickly than they would with a longer term mortgage.
- Lower overall interest paid. Even without a lower interest rate, you'll pay less interest overall with a 15-year mortgage because you'll have fewer monthly payments and less time for your interest to compound.
- Build equity faster. With higher monthly payments over a shorter term, you'll build equity far more quickly than you would with a longer term.
- Save money once your loan is paid. Another benefit: Paying off your mortgage in 15 years will allow you to save a significant amount of money each month once your loan is paid off – this means less debt, more savings that can go towards retirement, entertainment, or investments.
Provided you can afford the higher monthly payments, you can save a significant amount with a 15-year fixed rate mortgage.
Risks of a 15-Year Mortgage
Now, let's look at the other side of the coin and examine the risks of choosing a 15-year mortgage.
- Higher monthly mortgage payment. The biggest trade off is that you'll have a higher monthly payment with a shorter-term mortgage than you would with a longer one.
- Less money for other things. With that higher monthly payment comes a corresponding reduction in the amount of money you have to pay for other things. Signing on for a shorter-term mortgage might mean that you can't save as much for retirement or spend as much on entertainment.
You'll need to weigh the financial pros and cons to determine whether a 15-year loan is right for you.
Tips for Deciding Which Mortgage Term is Right for You
Before you decide between a 30 year or 15-year mortgage term, here are some tips to help you choose the term that's best suited to your needs and financial situation.
Is Your Income Stable and Sufficient?
Your income is the biggest determining factor in how large a mortgage payment you can afford. You should consider both the amount and the predictability of your income.
In most cases, someone with sufficient income to afford the monthly mortgage payment for a 15-year term and a reasonable amount of job stability can safely opt for a 15-year mortgage to save money.
How Long Do You Plan to Stay in Your Home?
The question of how long you want to stay in your home is also part of the equation. If you buy a home with the intention of staying there for a long time, then a 30-year mortgage may be your best option. You'll have lower monthly payments and without an immediate need to sell, you may be willing to trade slower equity building for short-term savings.
On the other hand, buying a home where you intend to live only for a short time may make a 15-year mortgage more attractive. Your monthly payments will be higher, but you'll build equity more quickly.
How Much Do You Have Saved for Retirement?
Your mortgage term can impact your ability to save for retirement. It may be that paying a little extra in interest over the term of your life is a worthwhile tradeoff if you take your monthly savings from a lower payment and put them into investments with compounding interest.
Opt for a Hybrid Approach
One option that appeals to borrowers is to use a hybrid approach. By that, we mean getting a 30-year mortgage but calculating the payment amount for a 15 year term. You can use our free mortgage calculator to do that.
This option gives you the flexibility to make extra payments when you can afford them. You can still set the goal of paying off your mortgage in 15 years by either adding to your monthly payment or making extra payments.
Choosing a 15- vs. 30-year mortgage is an important decision. The information and options we've provided here will help you decide on a loan term that works for you.
Are you looking for an experienced mortgage lender to help you get the home loan you need? Click here to read about SIRVA Mortgage's home loan options and start the preapproval process now.