# Pros and cons: 30-year mortgage vs. 15-year mortgage

My husband and I are in the early stages of building a house. As we modify our floor plans, the amount we'll need to borrow to build is on our minds. It's probably going to be the most expensive thing we'll ever purchase, and we need to decide what we want to borrow and what loan term we'll want.

The main differences between 15- and 30-year loans are straightforward. Fifteen-year loans have higher monthly payments, but you pay less interest, while 30-year terms have lower monthly payments, but you pay significantly more for the house in the long run. As with most areas of personal finance, however, this decision is about more than just the math. There are other important considerations, such as retirement savings, risk tolerance, and discipline.

First, let's take a look at the hard figures.

## Crunching the Numbers

Let's say that a 30-year-old borrower is buying a house for \$160,000, and her marginal tax rate is 25 percent. At the time this article was written, 30-year loans were at 5 percent and 15-year loans were at 4.5 percent.

Using a mortgage calculator, we'll compare the two mortgage terms by plugging in the mortgage amount and the 15- and 30-year interest rate.

• A 30-year term would give a monthly payment of \$859 (payment does not include taxes and insurance, which vary by locale). The borrower would pay \$149,211 in interest, and \$309,211 over the life of the loan.
• A 15-year term would give a monthly payment of \$1224. She'd pay \$60,318 in interest, and \$220,318 over the life of the loan.

The 30-year term lowers the monthly payment by \$365 and will save the borrower \$238 per year in taxes, but will cost \$88,893 more in interest over the life of the loan, and she will own her home when she is 60 years old. The benefits of the 15-year term are the substantial savings in interest and the fact that she will own her home by the time she's 45. The drawback is that her monthly payment will be higher.

## The Wiggle-Room Option

But what about the option of taking a 30-year term and paying it off in 15 years? A 30-year term paid in 15 years would yield a monthly payment of \$1265. The borrower would pay \$67,749 in interest, and \$227,749 over the life of the loan. She'll own her home at age 45, assuming she makes the extra payment each month. But if she fell on hard times, she wouldn't be locked into the higher payment.

Here's a Comparison of Each Option:

It's easy to see that the borrower will pay less for her home with the 15-year loan. But mortgages aren't one-size-fits-all. There are other factors to consider when deciding what is right for you.

## What Can You Afford?

In our example, the 30-year term works out to a monthly payment of \$365 less than the 15-year term. If you couldn't comfortably make the payment on the 15-year term, the 30-year term is the better option. You can always make extra payments when possible.

## What is the State of Your Emergency Fund?

Once you sign the loan, you'll be expected to make the same payment each month. If you take a 15-year term with a higher payment, you should have a substantial savings account in place to mitigate the risk from major unexpected expenses or job loss.

If you don't have much of an emergency fund, you're better off with a 30-year term, using the extra money to build your savings.

## Will You be Able to Meet Your Retirement and Other Savings Goals?

If you're leaning toward a 15-year term, be sure that you can still max out your retirement accounts and meet your other savings goals. If you can't, stick with the 30-year term.

On the other hand, if retirement is still decades away, you are in a position to invest more aggressively. You should be able to ride out the volatility of relatively aggressive investments.

If retirement is less than 15 years away, it might be better to pay off the mortgage early for security and peace of mind.

## How Do You Feel About Debt? What is Your Tolerance for Risk?

Many people are strongly averse to debt of any kind — and with good reason. Dave Ramsey is firmly in this camp, saying:

Don't borrow money. Period. If I can't get you to postpone the purchase that long, I strongly suggest you save a down payment of 20 percent or more, choose a 15-year (or less) fixed-rate mortgage, and limit your monthly payment to 25 percent or less of your monthly take-home pay.

Managing debt isn't easy, and for many people, Ramsey's hardcore anti-debt stance is the way to go.

But others are in a different place in the financial journey and are comfortable carrying mortgage debt if the borrowed funds can earn a higher rate of return somewhere else. Risk-adjusted returns need to be factored, but essentially, if you opted for the 30-year term at 5 percent, it's reasonable to think you can earn a higher return with a portfolio of index funds. Account for the tax deductions and the 5 percent is even lower.

While it's certainly possible to earn a higher return elsewhere, it comes down to your appetite for risk. You might get a better return by going with the 30-year term, but putting the money toward the mortgage is risk-free. Also, you have to decide if the extra money you might gain by investing elsewhere is more important to you that the peace of mind that comes with owning your home outright.

## Personal Discipline

If you can afford the payments on a 15-year loan, but you're concerned about the possibility of job loss or other major financial hits, you might be hesitant to commit to the higher payments. Another option is to take a 30-year term and pay it off in 15 years. You'll pay slightly more in interest than with the 15-year interest rate, but still significantly less than with the 30-year loan.

The drawback is that most people lack the discipline. According to the Federal Deposit Insurance Corporation (FDIC), 97.3 percent of people do not consistently pay extra on their mortgages. Many people lack the discipline to send in the extra money every month when it's not mandated by the bank. What this statistic doesn't mention is how many of the 97 percent would have fallen behind on their mortgages if they were locked into a 15-year mortgage.

If you are already saving regularly and have only tapped your emergency fund for major unexpected expenses, however, you might have the discipline to pay your mortgage off in 15 years. But consumers who spend any monthly savings are better off with the shorter term if they can afford it.

## What About the Tax Break?

While it's true that you do get more of a tax break from a 30-year loan, it shouldn't be the main consideration when deciding on a term. The 30-year borrower will pay less in yearly taxes than the 15-year borrower, but that's because the 30-year borrower is paying significantly more interest.

In our example, the borrower would save an average of \$238 per year in taxes with the 30-year loan, but will pay \$88,893 more in interest over the life of the loan than she would with the 15-year term.

## Which is Right For You?

In the end, your financial situation will determine the right mortgage term. If you can make the higher payment, have a substantial emergency fund, and can meet retirement and other savings goals, a 15-year mortgage is a good way to own the home in half the time and pay substantially less interest.

If just one of those conditions is not met, or if you are somewhat comfortable with debt and risk and wish to get a higher rate of return with other investments, the money saved each month with the 30-year mortgage payment may be better used elsewhere. You can always send in extra payments.

I'm still not sure which option is for us. What about you? Do you have a 15-year mortgage or 30-year mortgage? Do you prepay? What are your thoughts on risk versus higher returns?

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Sam
12 years ago

We are in a 25 year loan after refinancing, we do prepay but I agree that most people lack the discipline to prepay on a mortgage (including us). While we are prepaying, we don’t prepay every month or the same amount every month.

E.D.
12 years ago

We split the difference. We did a 30-year fixed at 5.5% and pay a bit more every month. The exact amount varies depending on what the expenses are for the month. Basically, we set up a payment that brings the amount in our checking account down to \$1000 at the end of the month. Right now, we are on schedule to pay off in 23 years. My husband was just laid off, so extra payments will probably need to stop until our modified budget is settled. Severance pay and unemployment have not started to come in, but depending on how… Read more »

Traciatim
12 years ago

I took out a 35 year loan because my spouse was in school, and I’m glad we did. After school it was decided to start a business rather than going to work for someone and the lower payment has really helped our finances. Once the income becomes more stable (and hopefully much higher) then we can start doing some major over-payments to hopefully have things done in 15 years anyway. Though our house was only 102K, so it’s fairly easy to keep up with.

Mark Wolfinger
12 years ago

“97.3 percent of people do not consistently pay extra on their mortgages. Many people lack the discipline to send in the extra money every month…”

To me, the reason the number is so high is not lack of discipline, but so that few understand the benefits of paying down loans. They get a bill from the mortgage company, an they pay it. Just like any other bill.

Victoria
12 years ago

I’m in the 8th year of 30 year (95/5) mortgage. I pay the higher payment each month and then, at the end of the year, pay at least an extra payment. Net result is two extra payments a year. The result is basically what you show: I’ll pay off the mortgage about 10 years early.

Caitlin
12 years ago

We have a 40 year mortgage (got at the very end of the bubble, when that was “normal”) and in one year of payments we have brought it down to 23 years remaining. Our plan is to continue to be as aggressive as possible and bring the down the time even more.

Note: I’m in Canada, not the USA, so things work a bit differently here.

Melanie
12 years ago

We bought a house in March. We chose a 30 year mortgage over a 15 year so that we would be comfortable with our payments over the long haul. We are diligent savers so we plan to make a 13th payment (or pre-pay a larger chunk of money) each year to get it paid off sooner. We are very happy about the decision we’ve made to do a 30yr and pre-pay.

12 years ago

We just recently made this decision. We bought a house a year ago with only 5% down (I know, not Dave Ramsey’s advice). We put a good chunk of our tax incentive to principle and pay an extra \$100 every month to principle. The interest rate just got to a point where it made sense for us to refinance. We could have gone with a 15 year term and not had any increase in payment (since we were paying an extra \$100 each month), but we decided to go with the 30 year term and continue to aggressively pay it… Read more »

Tim
12 years ago

Very interesting timing on this post. I’m closing on my first house in about an hour. I was right at the borderline of feeling comfortable with a 15 year loan, but in the end I decided to go with a 30 year loan and the intention of paying it off in fewer than 15 years. The reasoning was all about risk aversion. I don’t know what the rest of this year holds for me, let alone the next 15 or 30. I feel confident in paying off the mortgage early because I’ve never carried a balance on my credit card… Read more »

Michael
12 years ago

Excellent post April. Really topical and well worded.

I live in a country where rates are not as low as in the US. Typical lending rates are nearer to 11.5%, which gives differences in absolute terms that are much higher, ie 20 yr vs 30yr. Our interest rate volatility is also quite high, giving extra thought for reasons to go longer term on the home loan to ride out volatility in interest rates.

Michael (Cape Town – South Africa)

trb
12 years ago

Just did this, and decided to go with the 30 year fixed at 5% and prepay. The lower monthly requirements were the biggest factor – we knew we could still make them on one salary if we had to; not true of the 15 year payments. We’re able to round the payment up to an easily subtracted number on our automated withdrawls. The \$110 extra per month will let us pay off our 30 year mortgage in 17 years. I totally do not get the ‘tax writeoff’ argument. If I had enough cash, I would pay off the entire debt… Read more »

EscapeVelocity
12 years ago

I bought my house in 2001 with a 30-year mortgage, which I’ve been paying extra on, not absolutely every month but pretty consistently. I’m now in the process of refinancing the remaining balance to a 15-year loan.

One thing to consider is that the taxes and insurance are variable. If your house appreciates in value, the taxes go up, and any number of things can cause your insurance to do so. So allow for a decent cushion.

Aaron Margeson
12 years ago

Here’s my issue. If you’re talking about the difference of 0.5% interest, I’m having a hard time understanding how it’s worth it. I know personal finance isn’t always about the math, but the math is still an important component. With high yield savings accounts even offering very low interest rates right now, you still for example would make 1.4% interest if you stuck that extra money in let’s say ING right now, and there are better and safer investments besides savings accounts than your home that could result in even better returns than 1.4%, especially when locking your money up… Read more »

Ann
12 years ago

When I told the banker I wanted to pay off the mortgage in 10 years, he tried to get me to sign a 25 year agreement. Luckily, I learned early on to read all my contracts, so I caught the amortization term he snuck in there. Using small words because I’m a girl and I was young at the time, he said the 25 year mortgage would be more prudent and I could make extra payments to bring down the amortization. After raising a single eyebrow, I told him I know my finances and I would take my business elsewhere… Read more »

Tyler Tervooren
12 years ago

My mind has always been wired to think in terms of paying off a debt as fast as possible. The sooner its gone, the less interest you pay, the more secure your asset is, and the greater your peace of mind. However this often comes at the opportunity cost of setting aside other worthwhile goals. I’m interested to know how much inflation plays a role in how much you “pay” for your mortgage. The straight math says a 15 year mortgage saves you a ton of money, but what about the additional 15 years of inflation that you’ll benefit from… Read more »

Four Pillars
12 years ago

Interesting comparison. That’s a tough choice – the 15 yr payments are a lot more than the 30 yr. On the other hand – saving 0.5% interest each year is pretty huge as well.

In Canada, the whole mortage industry is quite different than the US.

Scott
12 years ago

I’m still not convinced a 15 year note is worth it over a 30 year mortgage. I agree, on the terms of what you pay in interest it will always be more with the 30 year mortgage. But, we always forget to take inflation and Net Present Value of money into account when making these calculations. (Same applies to prepaying your mortgage) Remember, a dollar today is worth more than a dollar tomorrow. Assuming inflation is 2% and you have a 5% rate on your mortgage, you’re carrying cost of the debt is really only 3% as you are using… Read more »

Anthony
12 years ago

I have a \$165,000 mortgage at 5.5% 30-year. My plans are to pay extra to the principal and hopefully be done with my mortgage in 15 years.

I like this method because, if something does happen to me or my wife or our jobs, then we can always go back to the lower monthly payments.

CasperTheGhost
12 years ago

I question the statement that “the borrower would save an average of \$238 per year in taxes with the 30-year loan” The borrower would be entitled to a standard deduction of \$5,700 (single) or \$11,400 (married filing joint). If the borrower is married filing joint there is no incremental tax benefit as a result of the mortgage interest deduction as interest never more than \$11,400. If the borrower is single, interest payments for the first 12 months are \$7,946 and \$7,044 for the 30-year and 15-year mortgages, respectively (assuming loan incepts 1/1). Thus in the first year the incremental tax… Read more »

Beth
12 years ago

Great post! I found this really helpful as I’m thinking of getting a modest place in a year or so. (I want to beef up the emergency fund first). The discussion here is helpful too! It’s great to hear from people who are a few steps ahead of me.

I think I like the flexibility of a longer term and paying it off early. Ideally, I’d like to rent out a room and use that money to pay down the mortgage early, but I know rental income isn’t always stable.

JerichoHill
12 years ago

I think Scott has a great post, as he correctly identifies a discounting process on the value of a loan. We’d have to go further however and discount tomorrow’s payment vs. today’s (simply paying today vs. tomorrow, tomorrow is less valuable).

Scott’s conclusion is correct. As one approaches the expected inflation rate, the value of prepaying a mortgage vs. the next best use approaches 0.

It is VERY important to discount your mortgage payments using NPV calculations, something I have seen no free mortgage calculator do online.

jdb
12 years ago

We have a 30-year that we’re paying like a 15. Like some others above, we went with the 30 for the risk factor – if one of us lost our job we could still pay the minimum with a single income. But while we have two incomes we’re being fairly aggressive about paying it down, while still leaving money for emergency fund, home improvements and fun.

Sara A.
12 years ago

I would say that, if you can only afford the home on a 30 year mortgage, then you can’t afford the home. Also, I would say that advising people to take a 30 year mortgage and pay extra would only apply to ADVANCED frugality. No, most people are not capable of comprehending the benefits of prepayment, let alone of having the discipline to follow through. We have a 15 year mortgage at 5.5%. We have paid additional money on the principal ranging from \$200/month to \$500/month. Currently we are not paying additional because of underemployment. We bought less house than… Read more »

David/Yourfinances101
12 years ago

I would jump all over a 15-year mortgage if I could afford to–I simply can’t at the moment.

The next best thing however is to pay extra every month that I can. Sometimes its \$25, sometimes its \$100.

I loved the chart at the top–it really spells everything out

Kim
12 years ago

Timely post to something related – Sallie Mae loan repayment documents were sent out today, indicating the monthly payment. After I picked myself up off of the floor from shock, I mused about what to do – attempt to refinance (unlikely to get a better rate today!), pay early, graduated income payments, etc. Your take-30 and pay-in-15 option sounds like the best (in the student loan case take 10 and pay in 5) for awhile.

Financial Samurai
12 years ago

I think the right strategy is to get a 15-yr mortgage if you can handle the extra payments, and pay it off sooner in 10 years.

But, the more digestable strategy is to just get a 30-yr mortgage and pay it off in 15 years.

Best

Tim
12 years ago

I find arguements about payment differences very basic. Anyone can say they spend less on a 30 versus a 15. Everyone should be able to say they spend more on interest on a 30 versus a 15, or they never read the loan disclosures. An asset versus liability, or balance sheet, approach needs to be viewed when making these decisions. I liked #17s approach but #4 states clearly the behavioral side of personal spending/savings. If one can not make extra payments or save the extra they would have been paying on a 15 versus a 30. Then they should go… Read more »

elisabeth
12 years ago

we did a lot of things that other people have suggested: 1) we saved up a large down payment — enough that we did not have to have mortgage insurance added to our loan: immediate savings that we could add to our monthly payment. 2) we didn’t buy all the house we could, but we bought a house big enough for our needs, and then some — it had a “mother in law apartment in the finished basement. 3) we didn’t remodel right away (sigh, I lived with a kitchen and bathroom I didn’t like for 7 years) 4) instead,… Read more »

Phil
12 years ago

Mod Casper up. I got married this year, and now my mortgage/property tax deductions go to zero because they are less than \$11,400. And if we decide to file separately but married, we both have to either itemize or take the standard deduction. If you have a business or regularly itemize, then yes it’s still a good deal, but for everyone else I feel the benefits are overstated. The tax benefits are always bandied about, but really you are paying 3 times what you are “saving.” (For example, \$8,000 in interest/prop. taxes will reduce your taxable income by \$8,000, netting… Read more »

ldk
12 years ago

We custom built our home 12 years ago. We had a 25% down payment and used a HELOC secured by the property to fund the remaining 75%….did not take a ‘mortgage’ at all. We were able to take advantage of a lower interest rate, had the option to make interest only payments in the event of a financial crisis (we never did) and could make bulk payments whenever we were able without any penalties. We paid it off in 12 years–3 years shy of our goal of 15 years. This strategy can work if you are disciplined in making your… Read more »

12 years ago

I do not agree with Sarah A. (#22) about “if you can only afford the home on a 30 year mortgage, then you can’t afford the home”. My husband and I bought our first home in 2007 when the market was still at top. We didn’t even have any down payment (20% down = 70K), however we were lucky to get a 100% loan in 30 years, and only had to pay around 11K in closing costs. Should we choose 15-year loan? We could, but we didn’t feel comfortable with the idea. To us, the idea of having some money… Read more »

Stephen
12 years ago

What should i do? Currently my better half and I have \$77,000 in CDs saved for a down payment towards a house. Our rent is currently \$812 a month – brand spanking new apartment complex, pool, hottub, fitness center, gated entrance, great location outside Knoxville. We are on pace to add \$24,000 in the next year to our down payment. We plan to continue this trend for the next year maybe two. Would it be better to keep paying rent, thus saving for another three to five years? Or would it be better to buy in a year – assuming… Read more »

R Hookup
12 years ago

I find that the bank may make it hard to instill some of the discipline to pay extra on the mortgage. With my mortgage company, if I set up extra payment automatically as part of the monthly auto-pay, the bank will change the payment back to the basic mortgage payment anytime the mortgage amount changes (usually changes in the escrow account). They do this even if the new amount owed monthly is less than what I set up my auto pay for. I can end up calling again to reset the pay 2 or 3 times a year which means… Read more »

Steve
12 years ago

Scott
12 years ago

@Stephen It really depends on your plans. Are you going to be in Knoxville for a while? Or could you move in the next 12 month? In terms of paying outright vs a mortgage I would point you to my post (#17). You gain financial flexibility by purchasing outright as you have no required payment to a bank every month, but you do lose flexibility in terms of the liquidity of your investments. Assuming you can get a ~5% mortgage and again assuming inflation is around 2%, can you find an investment vehicle that would give you a return of… Read more »

Kelleigh
12 years ago

I have a 30yr @ 5.5 and while I can afford the 15yr route (either via extra payments or an actual 15yr loan), I much prefer to keep that extra \$400ish each month for now to beef up my emergency fund. Once I have about a year’s worth of income in there, then I’ll start paying more on the mortgage. I think, as many have said, it’s not just about the math – for me, as a single woman at 40 years old, it’s as much about what I’m comfortable with since I’m my only source of income, and cash… Read more »

Manisha Thakor
12 years ago

Loved this post – every prospective homeowner should read it. The one other item I’d throw into the discussion pot is how much home should a person be striving to buy in the first place. My favorite rough rule of thumb is to keep the total purchase price of your home to no more than 3x your income (which in a normal interest rate environment gets you to essentially the same place as Dave Ramsey’s advice). If you’re not fascinated by personal finance the way those of us who read PF blogs are 🙂 having a simple guidepost like that… Read more »

Martin
12 years ago

I don’t agree with the logic of giving yourself “wiggle room”. If you think you might need wiggle room, it’s probably because you are trying to buy more house than you can really afford. If you go with the 30 year term with plans to pay it as if it was a fifteen year, make sure that your payments are already less than 25% of your income at the 15 year amortization. \$7,400 is a lot of money to pay for some “wiggle room.” Instead, why not self-insure the risk by ramping up your emergency fund savings and making a… Read more »

Abe
12 years ago

Barb1954
12 years ago

The decision between a 30- and a 15-year mortgage doesn’t have to be set in stone for the length of the loan. When we bought our house 20 years ago, we started with a 30-year loan at 9.75%. We refinanced a couple years later to another 30-year loan when rates dropped to 7.75% For a few years, we also participated in the bank’s bi-saver payment plan in which we paid half our monthly payment every two weeks, ending up with 13 payments a year. As our incomes rose, we could afford a larger payment. So when rates dropped into the… Read more »

mimms
12 years ago

My DH and I did something a little different this time when we refinanced, so I thought I’d add this to the mix. We’ve always been pretty conservative financially, and bought a mortgage we could pay on one salary. DH lost his job and took a new one at half the take-home pay, so I wanted to get the mortgage down even lower. We refinanced with a 30 year (again, to maximize our monthly security) with payments just under \$700/month and will pay \$850/month for two years as we rebuild savings and take care of a major project. Here’s the… Read more »

HollyP
12 years ago

One issue to consider is how your income and expenses might change in the future. If you have no kids but plan on having them after you’ve purchased the house, you need to factor in either losing one income, or the added expense of child care. (In my area, daycare costs more than the mortgage.) I’m glad I did this, because one of my kids was born with a medical issue which required intensive medical treatment for a year. My husband ended up quitting work for that year to take care of her, and it did not create a major… Read more »

marian
12 years ago

Depending on your age, I think 15 years is a good time frame. However, if that will prevent you from having an emergency savings account or meeting other goals, I’d look for a 20-25 year mortgage or a 30 year that you can pre-pay w/o penalty. Also, my daughter is an architect & she says that the biggest mistake that homeowners make regardless of income is building a house that is too big. Wasted space = high utility bills, rooms that appear to need a lot of furniture, high maintenance costs etc. An architect or designer can help design a… Read more »

Greg
12 years ago

Good numbers but one of the biggest advantages the 15 year note (or paying off the 30 year in 15 years), in my opinion, is the ENORMOUS overall value in having the mortgage paid off relative to each borrowers age at the time of payoff. Example: Borrower buys a house at age 25 when getting married and gets a 15 year mortgage. Has a baby at age 28 and 32. The mortgage is paid off entirely by the time the borrower is 40 and when the kids are still relatively inexpensive at ages 12 and 8 . Conversely, same borrower… Read more »

DeborahM
12 years ago

To answer the original question “What about you? Do you have a 15-year mortgage or 30-year mortgage? Do you prepay? What are your thoughts on risk versus higher returns?” We were older when we bought a house together: 42 and 43. Had 40% downpayment saved, so hadn’t completely been frittering away our money on fun and games. LOL. Took a 15 yr mortgage and have been pleasantly surprised at the effect of throwing extra money at it whenever we can. In 2 years and 3 months we expect to have paid it off completely (6 yrs 9 months total), and… Read more »

EXS
12 years ago

I had a 30-year at 5.375% for monthly payments of about \$1400. When I refinanced to 4.875% (will recover closing costs in 1.5 years), payment went down about \$200, but I still pay \$1400 as that’s what I was used to/had budgeted for years. This shaves off 8 years (2 off the original loan’s). As the principal decreases and tax benefit no longer a benefit (eg. standard deduction is greater), that’s the time to accelerate paying it off.

Financial Samurai
12 years ago

The one thing to note guys is inflation. If you believe inflation is going to be huge, then it ironically makes sense to have as much debt as you can b/c inflation simply inflates away your debt. Essentially, you are going short bonds b/c rates will go up if inflation arrives.

Barb1954
12 years ago

Samurai, I don’t care about inflation. I care about owning my own home outright. Debt of any kind — home or car — just means that you’re just renting your lifestyle from the bank.

Cindi C
12 years ago

Great discussion (some deep numbers thinking about future dollars). Two things:

– Read your mortgage for an early pay-off penalty and make sure to factor that it (though it will still probably be much, much less than the interest over 30 yr).

– I am looking for a calculator to help me figure the impact of my extra payments – any recommendations?

April
12 years ago