Buying a home is the largest purchase most people ever make. Since the typical homebuyer doesn’t have the savings required to purchase a house with cash, they borrow the funding from a bank or lending agency, usually in the form of a mortgage. But the amount of time necessary to pay off the mortgage varies widely, depending on loan terms. Two common mortgage options include the 15-year mortgage and the 30-year fixed mortgage.
If you’re on the hunt for a new home, make sure to learn the potential benefits and drawbacks of different loan terms.
15-year mortgage vs. 30-year mortgage
Put simply, a 15-year mortgage takes 15 years to pay off, while a 30-year fixed mortgage takes twice as long. It seems pretty straightforward, but the mortgage terms impact your monthly payment, interest payments and how quickly you build equity.
If you’re planning on staying in your home for a couple of years, a 15-year mortgage may prove beneficial. It has a higher monthly payment, but you’ll pay far less in interest and own your home in half the time it would take in a standard 30-year mortgage.
A 30-year fixed mortgage is a popular choice for many homebuyers due to the lower monthly payments. However, you’ll pay significantly more in interest payments over the life of the loan.
Key considerations for choosing between a 15-year and 30-year mortgage:
- How long do you plan to live in the home?
- Can you afford the monthly payments for a 15-year mortgage?
- How much could you save on interest payments with a 15-year mortgage?
Deciding between a fixed and adjustable rate mortgage
Deciding how long you plan to stay in your new home should be a key consideration to decide between a 15-year and 30-year mortgage.
Fixed rates and adjustable rates have distinct benefits that buyers should carefully consider. Fixed rate mortgages have the same interest rate over the entire life of the loan. For many homebuyers, fixed rate loans offer greater stability because you know exactly how much you’ll owe each month, and rates don’t fluctuate.
Adjustable rate mortgages include an interest rate that can change periodically, which means monthly payments can increase or decrease depending on market conditions. Generally, adjustable rate mortgages start off with lower rates than a comparable fixed rate mortgage. But after a few years, adjustable rates increase above those of fixed rate mortgages.
For buyers who value predictability and stability, fixed rate mortgages are often the best choice. But adjustable rates can be a good choice for buyers who plan to move or sell their home in a few years, allowing them to reap the benefits of lower initial interest before rates increase.
Paying off your mortgage early
If you’re thinking about paying off your 15-year or 30-year fixed mortgage early, first check if your loan includes a prepayment penalty. A prepayment penalty charges a fee for an early pay-off. If your lender allows early payment without a prepayment penalty, ensure it goes toward the premium — not the interest.
Consider these four tips to pay off your mortgage faster:
- Increase your principal payment: Increasing your principal payment each month reduces your loan total and can significantly lower future interest payments.
- Change loan terms from 30 years to 15 years: Switching from a 30-year to a 15-year mortgage increases your monthly payment, but you’ll own your home in half the time.
- Make an extra payment: If financially possible, make one extra loan payment per year.
- Make payments every two weeks: Paying every two weeks instead of monthly adds up to an extra mortgage payment by year’s end. Not all lenders allow for biweekly payments, so be sure to check before relying on this strategy.
To better understand the financial savings on a 30-year versus 15-year fixed rate mortgage, consider the following example:
- 30-year fixed rate loan: 4.10%
- 15-year fixed rate loan: 3.43%
- 30-year loan: $966
- 15-year loan: $1,432
Interest paid on life of loan:
- 30-year total: $147,903
- 15-year total: $56,122