Why is a 15-year fixed-rate mortgage better than a 30-year

Published Wed, Sep 16 2020 9:37 AM EDTUpdated Thu, Sep 17 2020 11:38 AM EDT

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With mortgage rates hitting record lows, it can be tempting to consider a 15-year-mortgage instead of one spanning 30 years.

The draw: The interest rates for 15-year loans are lower, currently 2.65% versus 3.03% for a 30-year, according to Bankrate.com. Combined with a shorter timeline, you'll pay substantially less in interest overall, build equity faster, and be debt-free sooner. But there's a catch: Your monthly payments will be much bigger than with a 30-year mortgage.

That's a big commitment, points out self-made millionaire Steve Adcock, who retired in his 30s.

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"Possibly unpopular opinion: Forget 15-year mortgages. Do 30," Adcock suggested on Twitter earlier this summer. "Why? Because making extra payments can turn it into a 15-year. And, you can reduce your mortgage payments if times get tough, then resume higher payments later. Give yourself options. Flexibility is nice!"

Adcock tweet

If you borrow $200,000 with a 30-year mortgage at current rates, your monthly payment would be about $846. Over the life of the loan, you'll pay almost $105,000 in interest.

Opt for a 15-year loan instead and your payments will be roughly $500 more, or about $1,348 per month. But you'll pay just about $43,000 total in interest, less than half as much as with the 30-year loan. 

Adcock's point of view isn't actually unpopular. Financial experts agree that the flexibility of lower monthly mortgage payments is important for many homeowners.

"I've explained it to clients this way," says Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors in South Barrington, Illinois. "If you had a 15-year mortgage and a 15-year super-duper flexible mortgage, which one do you think you would choose?"

Most them then ask what a "super-duper flexible" mortgage entails. "If you need cash, the payments can drop 20% if you want any time you want," he says, "and the rate is only about a quarter of a point higher" than the typical 15-year loan.

The punchline, La Spisa says, is the "15-year super-duper flexible mortgage" is a 30-year mortgage that, like Adcock suggested, you pay back more quickly as your finances allow.

When your financial situation allows, you can put extra money toward your balance and pay off the loan faster — as Adcock put it, turning it into a 15-year. But when money is tight, then you can take advantage of the 30-year's lower payments and use the difference to help with other bills, says Greg McBride, chief financial analyst for Bankrate. You're not locked into that large payment.

"Money in the bank will pay the bills; home equity will not," McBride says.

The flexibility of a lower mortgage payment also helps if you have another goal to pursue, like bolstering your emergency fund, paying down high-interest-rate debt, or getting on track with retirement savings. Given the low interest rate on mortgages, investing the difference can be an especially smart move.

"A 15-year fixed may be a great choice, but that's often for someone who has already checked the other boxes: They're already maxing out their retirement savings, have no high-interest debt, and have adequate savings," McBride says. "Unfortunately, too few people have checked all those boxes."

The article "Forget 15-Year Mortgages. Do 30, Says Self-Made Millionaire" originally published on Grow+Acorns.

Wondering what mortgage to get when buying your house? After you sift through all the junky options, it usually comes down to deciding between a 15-year vs. a 30-year mortgage. But which one is better?

At Ramsey, we’ve been teaching for decades how the 15-year mortgage is the better option. And the simple reason is because the total cost of a 30-year mortgage is way more expensive.

Let’s look at the numbers!

15-Year vs. 30-Year Mortgage: How Are They Different?

Simply put, a 30-year mortgage will be paid off in 30 years, while a 15-year mortgage will be paid off in 15 years. No surprises there, right?

30-Year Mortgage

Because a 30-year mortgage has a longer term, your monthly payments will be lower and your interest rate on the loan will be higher. So, over a 30-year term you’ll pay less money each month, but you’ll also make payments for twice as long and give the bank thousands more in interest.

15-Year Mortgage

On the other hand, a 15-year mortgage has higher monthly payments. But because the interest rate on a 15-year mortgage is lower and you’re paying off the principal faster, you’ll pay a lot less in interest over the life of the loan. Plus, you’ll only be in debt for half the time.

15- vs. 30-Year Mortgage Comparison

Let’s look at an example. Suppose you want to buy a $300,000 house and have a 20% down payment ($60,000). That means you need a mortgage for $240,000.

Here’s what your expenses would look like on a $240,000 home loan—whether you chose a 15-year mortgage or a 30-year mortgage:

FYI: We calculated the numbers for both monthly payments on our mortgage calculator using principal and interest only. Then, we calculated the total interest and total mortgage amounts on our mortgage payoff calculator.

As you can see, the 30-year mortgage would have you paying over $100,000 (that’s 33%) more than you’d pay with a 15-year mortgage!

Sure, it feels nice on the front end to save nearly $600 a month by choosing the 30-year mortgage—but your interest rate will be higher and you’ll spend double the amount of years in debt!

Is a slightly cheaper mortgage payment on the front end worth a hundred grand on the back end? No way!

Do You Pay More Interest on a 15- or 30-Year Mortgage?

The average interest rate for a 30-year mortgage was around 0.5–1% higher than a 15-year mortgage for the past several years.1,2

One percentage point may not seem like much of a difference—but keep in mind, a 30-year mortgage has you paying that difference for twice the amount of time compared to a 15-year mortgage. That’s why the 30-year mortgage ends up being so much more expensive.  

What’s a Disadvantage of Getting a 15-year Mortgage Instead of a 30-Year Mortgage?

The only downside to a 15-year mortgage compared to a 30-year mortgage is that it comes with a higher monthly payment—but really, that’s a good thing!

With the higher monthly payment of a 15-year mortgage, more of your money will go toward paying off the principal amount of your loan—instead of getting thrown away on interest.

That’s how the 15-year mortgage allows you to pay off your loan in half the time compared to a 30-year mortgage—and avoid a mountain of interest payments.

Is It Cheaper to Pay Off a 30-Year Mortgage in 15 Years?

Some people get a 30-year mortgage, thinking they’ll pay it off in 15 years. If you did that, your 30-year mortgage would be cheaper because you’d save yourself 15 years of interest payments.

But doing that is really no different than choosing a 15-year mortgage in the first place—besides that choosing to make those extra payments would be up to you.

Good intentions aside, this rarely happens. Why? Because life happens instead. You might decide to keep that extra payment and take a vacation. Or maybe it’s time to upgrade your kitchen. What about a new wardrobe? Whatever it is, there’s always a reason to spend that money somewhere else.

When you have a 15-year mortgage from the beginning, you won’t be tempted to use that money for something else. You’ve got built-in accountability to get your house paid off fast!

Why Choose a 15-Year Mortgage Over a 30-Year Mortgage?

Here are the main reasons we teach home buyers to choose a 15-year mortgage instead of a 30-year mortgage:

1. You’ll save tens of thousands of dollars.

Remember our example from earlier? That 30-year mortgage would cost $100,000 (33%) more than a 15-year mortgage. Imagine what you could do with an extra hundred grand in your pocket by choosing a 15-year mortgage!

2. You’ll build equity in your home faster.

One way to build equity (the value of your home, minus what you owe on it) is to pay back the principal balance of your loan, rather than just the interest.

Since you’re making bigger monthly payments on a 15-year mortgage, you’ll pay down the interest a lot faster, which means more of your payment will go to the principal every month.

On the flip side, the smaller monthly payments of a 30-year mortgage will have you paying down the interest a lot slower. So less of your monthly payment will go to the principal.

3. You’ll pay off your house in half the time.

Guess what? If you get a 15-year mortgage, it’ll be paid off in 15 years. Why would you choose to be in debt for 30 years if you could knock it out in only 15 years?

Just imagine what you could do with that extra money every month when your mortgage is paid off! That’s when the real fun begins! With no debt standing in your way, you can live and give like no one else.

Get Help Choosing the Right Mortgage

It’s simple. Don’t settle for a 30-year mortgage. You can make the right mortgage decision by choosing a 15-year fixed-rate mortgage from the beginning. It’s a smart financial decision that will bless your family for years to come.

Talk to our friends at Churchill Mortgage about getting a 15-year mortgage that fits your budget so you can pay off your home fast.

Get help from a mortgage expert we trust!