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15-Year vs. 30-Year Mortgage? How to Decide

 

Banks offer a dizzying array of mortgage options, and one of the biggest decisions you'll have to make in the mortgage process is how long your home loan will last. In other words, you'll have to weigh the pros and cons of a 15-year mortgage and 30-year mortgage.

How long are you willing to linger with your loan? What kind of monthly payments can you stomach? How do mortgage rates affect the bottom line? We're here to help with a little mortgage math!

15 or 30 years: What's the difference?

At first glance, the difference between a 15-year mortgage and a 30-year mortgage seems obvious: A 15-year mortgage stretches your monthly payments over 15 years, and a 30-year mortgage spaces mortgage payments out over, of course, 30 years. But you already knew that much about mortgages, right?

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Now here's something you might not know about mortgage terms: Since a longer loan life means you can make smaller payments, a recent survey found that 86% of home loan applicants opt for a 30-year mortgage (a fixed-rate mortgage).

Here's how the mortgage term numbers play out: If you purchase a $300,000 home with a 20% down payment, a 30-year (fixed-rate) mortgage at the going interest rate (currently 3.68%), your mortgage payment will be $1,102 per month for 30 years.

Get a 15-year mortgage for the same loan amount, and you'll be rewarded with a slightly lower interest rate (currently 2.69%), but you'll have to cough up $1,622—that is, $502 more per month on your mortgage payment. That's a pretty significant difference in monthly payment, no doubt.

Bottom line? If you can't afford large monthly payments or are worried about not being able to in the future due to job loss, sporadic income, health issues, or whatever other curveballs might come your way, it's understandable that you'd opt for a 30-year mortgage with the higher interest rate rather than 15-year loan with the lower mortgage rate. The peace of mind alone could be priceless when it comes to choosing the terms of your mortgage (which may also have property tax rolled into it). And in many cases, the 30-year mortgage (even with its higher interest rate) is a more practical loan, depending on personal finances and cash flow.

Ultimately, your potential circumstances over the life of the loan should absolutely be taken into consideration when selecting a mortgage and its corresponding monthly payment. How will (or won't) that monthly payment fit into your life for (possibly) decades to come? How much house do you really need at this point in your life, and does it make sense to pursue a smaller loan and/or home instead? Will you want or need to refinance your loan down the road? Asking these questions is an essential exercise in making a prudent mortgage decision, particularly for first-time homebuyers who are navigating the changing and still settling landscape of their financial situation.

Stepping into a home loan requires more than just number-crunching; it demands a bit of soul-searching and thinking ahead, too. This is something that will be a significant part of your life every month for many years.

Benefits of a 15-year mortgage

What many homeowners forget to factor in is that a 15-year mortgage may cost more now, but it will save you major cash in interest payments to your lender down the road.

"A 15-year loan will save you a ton of money," says Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage."

You might be surprised by just how much, so let's continue with the above example: For a $300,000 home purchased with a 20% down payment, a 30-year mortgage at today's average interest rate (3.68%) will end up costing you a total of $456,708—that's in interest and principal—by the time those 30 years are up.

By contrast, a 15-year loan at today's average interest rate (2.69%) will ultimately cost you only $351,933. In other words, a 15-year mortgage will ultimately save you $104,775 in interest payments—serious money, which might add up to a very good reason to tighten your belt and give the 15-year mortgage a try.

You can run your own numbers with realtor.com®'s mortgage calculatorto figure out which loan approach is right for you. Also be aware that your debt-to-income ratio may be a factor in whether you qualify for a 15-year mortgage.

How to save money on a 30-year mortgage

If you can't afford making the higher payments on a 15-year mortgage but like the idea of saving on the loan's interest, there are other ways to make that happen, even if you have a 30-year mortgage.

For one, most lenders don't prohibit borrowers from paying off a loan early, so there's no reason you can't pay off a 30-year mortgage in just 15 years (or 20, or 25, or whatever you can manage). So if you do find yourself with extra money one month, due to a bonus or tax refund, consider putting it toward paying off your mortgage early. You'll save a huge chunk in interest without sacrificing the sense of security that comes with knowing you can easily afford to make your monthly mortgage payments—and maybe occasionally a little extra.

Just know that a 30-year mortgage does not always require you to spend 30 years paying off the loan. You can technically make it into a mortgage that best fits your personal situation. And for that matter, you can always explore the option of a refinance on your mortgage if you're interested in modifying your mortgage's interest rate or terms.