When considering buying a house, the biggest cost that likely comes to mind is your monthly mortgage payment. You can handle these payments by exploring two choices: a 15-year mortgage or a 30-year mortgage.
When you go for the shorter 15-year plan, your monthly payments will be higher, but you’ll complete paying off the loan more quickly. On the flip side, a 30-year plan makes your monthly payments lower, but you’ll end up spending more money on interest in the long term.
15-year vs. 30-year mortgages: What’s the difference?
Most people who want to buy a home usually pick a 30-year fixed-rate mortgage. It’s actually the most popular loan term in the country. With this type of mortgage, homeowners get 30 years to pay off the loan. This keeps their monthly payment lower, even though they ultimately pay more interest overall.
With a 15-year mortgage, however, you can finish paying back the loan in half the time. But this only works if you can afford a higher monthly payment.
The main difference between qualifying for a 15-year or a 30-year mortgage is that for the 15-year term, you’ll need to earn a higher income and have a lower debt-to-income (DTI) ratio because the monthly payments are higher. Even though the interest rate is lower with a 15-year mortgage, the monthly payments are usually less with a 30-year mortgage.
If everything else stays the same, a longer mortgage term means smaller monthly payments because you’re spreading the loan amount over a longer period. Adding to that, a 15-year mortgage would also have a lower annual percentage rate, or APR, compared to a 30-year mortgage.
Learn more about how choosing a 15-year or 30-year mortgage affects your monthly costs by using our mortgage calculators.
15-year vs. 30-year mortgage example
Here’s an example with a $400,000 loan. We’re assuming an interest rate of 7.11% for the 30-year option and 6.5% for the 15-year option, based on Loan Pronto’s rates as of August 24.
For a $400,000 mortgage with a 7.11% interest rate, your monthly payment would be $2,691 for 30 years. In total, you’d pay $568,697 in interest over the course of 360 monthly payments.
On the other hand, a 15-year mortgage comes with a lower interest rate. If you go for a $400,000 mortgage with a 6.5% rate, your monthly payment would be $3,484. However, you would only pay $227,197 in interest over the life of the loan.
|Mortgage Term||Monthly Mortgage Payment||Total Cost Of Mortgage Interest||Total Cost Of Mortgage|
|30-year at 7.11%||$2,691||$568,697||$968,697|
|15-year at 6.5%||$3,484||$227,197||$627,197|
While the monthly payments are lower with a 30-year mortgage, the interest rate is higher and is spread over a term that’s twice as long. As a result, a 30-year mortgage ends up being significantly more costly than a 15-year loan over time, mainly due to higher interest rates.
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15-year mortgage pros and cons
Choosing a 15-year mortgage might seem more appealing. You can likely save a lot on interest and own your home quicker. However, there are factors to consider.
Pros of a 15-year mortgage
- Typically lower interest rate due to the shorter repayment period of 15 years vs. 30 years.
- Much less interest paid over the loan’s lifespan, thanks to the shorter repayment term.
- Loan gets paid off faster due to the condensed loan duration.
- Builds equity faster, as more of the monthly payment goes toward the principal and less toward interest.
Cons of a 15-year mortgage
- Higher monthly payments required to expedite repayment.
- Potentially more challenging to qualify for due to the need for a higher monthly income for on-time payments.
- Limited flexibility in budget for unexpected expenses, given the higher monthly payments.
30-year mortgage pros and cons
Opting for a 30-year mortgage might provide extra room in your monthly budget, and it’s usually easier to qualify for. However, you’ll end up paying significantly more in interest.
Pros of a 30-year mortgage
- Smaller monthly payments due to the longer loan period.
- Option to repay the mortgage faster by making larger or extra payments when possible.
- More financial flexibility for unexpected emergencies each month, thanks to the lower monthly payment.
- Lower income requirements, since you don’t need to prove the ability to manage higher payments.
Cons of a 30-year mortgage
- Generally higher interest rate that’s stretched over twice as many years.
- Takes a longer time to fully pay off since it’s a 30-year term, not 15.
- Much more interest paid vs. a shorter-term loan, as you’re paying interest over a greater number of years.
Should you choose a 15-year or 30-year fixed-rate mortgage?
Loan Pronto’s mortgage calculators can assist you in estimating monthly payments for both a 30-year and a 15-year mortgage. This helps you see how much house you can realistically afford based on your income.
By closely examining your monthly budget and financial commitments, you can figure out what type of mortgage payment would fit comfortably within your means. If the payments for a 15-year mortgage seem consistently too high for you, you can think about making extra payments toward a 30-year mortgage when you can, to pay it off sooner.
Ultimately, your decision should be guided by the payment you can comfortably handle. It’s also important to consider if a larger payment would affect other important financial goals, such as saving for retirement. Remember that you might qualify for a bigger loan, but it’s not always wise to borrow the maximum amount available.
Use our free mortgage and amortization calculators to determine your monthly payment, including mortgage insurance, taxes, interest, and more.