Are you in the market to buy a house soon? It’s definitely an exciting time, but it often comes with a TON of questions! Is the house in a good area? What’s a fair price for the property? How much of a down-payment should you make? And, here’s the big question (and the one we’ll be focusing on today): Should you take out a 15-year mortgage or a 30-year mortgage? These questions aren’t always so easy to answer and might even leave you with more questions than you started with! My goal today is to help you decide which mortgage option is right for you.
15-Year Mortgage or a 30-Year Mortgage?
When I was growing up into adulthood and started considering a house purchase, I began by asking the same question – “Should I take out a 15-year mortgage or a 30-year mortgage for my first home loan?” My adult friends pretty much all had the same answer and started pounding it into my head that I should pay off my home in 15 years, but is this the right answer all the time? Should everybody blindly take out a 15-year mortgage and consider it a win? No, probably not. So what are the pros and cons of each option, and which option is right for you?
For most people that are deliberating between a 15-year mortgage or a 30-year mortgage, I do believe that they should first consider a 15-year mortgage for these simple reasons:
- You’ll be out of debt much earlier
- You’ll pay thousands of dollars less in interest
- Pay thousands less in PMI
- You’ll be forced to live more modestly in your younger years (yes, I consider this a pro)
By taking out a 15-year mortgage instead of a 30-year mortgage, you could be completely debt free by age 45 instead of age 60. Put simply, do you want to show your debt free smile with your own teeth, or with dentures? That’s the difference, and it’s HUGE!
By taking out a 15-year mortgage, you can enjoy a super low 3.0% interest rate (at this current moment in time), which means you’ll pay much less in interest – typically totaling tens of thousands of dollars.
Since you’ll be paying your mortgage down much more quickly, you’ll pay the bank thousands less in Private Mortgage Insurance (PMI) vs. a 30-year term.
And finally, by taking out a 15-year mortgage, you’ll pay more per month (which for some, is a con), but it will initiate a more simple life and will limit your “need” for spending down the road. In other words, saving will be much easier later in life since you’re used to living on less today.
The cons of a 15-year mortgage are simple, and we already mentioned one; you end up paying a few hundred bucks more per month. If you’re tight on money as it is, then this could hinder you from increasing your savings and therefore put you in jeopardy if an emergency ever arises.
Take a look at the below example. If you would borrow $180,000 from the bank to buy a $200,000 house, you can expect to make monthly payments of $1,243.05. In total, after 15 years you would end up paying $223,748 for your $180,000 loan. It sounds kind of terrible, but just wait till we look at the 30-year loan example!
30-Year Mortgage: Pros and Cons
There are really two major pros to the 30-year mortgage that I hear again and again:
- You pay less per month
- With more money, you could invest more
Financial “gurus” all think they’re so smart when it comes to money. When deliberating between a 15-year or a 30-year mortgage, many financial advisors recommend that you take out a 30-year mortgage (to owe fewer dollars each month) and invest the difference into the stock market. After all, the stock market gains an average of 7% each year, and if you borrow just 4% from the bank for the mortgage, then you’re essentially earning more than you borrow.
This is all well and good if two things happen – 1) the market actually goes up (this hasn’t seemed to happen in a while), and 2) you actually invest the difference. In theory, taking out a 30-year mortgage makes sense on paper, but the logic forgets all about the risk in the stock market and the bad behaviors of the human species. Out of 1,000 people, I would say that maybe one person would benefit from this technique. They would invest wisely and would actually be nerdy enough to load an extra couple hundred bucks into the market each month.
The major cons of this plan are pretty apparent:
- You lose thousands of dollars in interest payments
- You pay out more in PMI over the years
- You’ll be in debt for at least 30 years of your life – that’s a LONG TIME!
The only reason you should consider a 30-year mortgage is if money is simply too tight to make the payments on a 15-year mortgage. In my book, a strong emergency fund is more important than saving money in interest, but constantly living on the edge of financial collapse.
If you are still deliberating between a 15-year or a 30-year mortgage, take a look at the chart below. This is what you can expect to pay when you borrow $180,000 from a bank over a 30-year term.
Over the course of 30 years, you would end up paying over $300,000 for your $180,000 loan! For the 15-year loan, you’d pay $42,000 in interest payments; for the 30-year mortgage, you’d pay $115,000! Isn’t it amazing what a difference 0.75% can make??!
What About Door #3 or #4?
In the world of home loans, there’s certainly more to choose from than a 15-year or a 30-year mortgage – many of which I wouldn’t suggest, but there are two other fantastic options that come to mind.
The 10-Year Fixed Mortgage – This would obviously come with a higher payment each month, but you would pay far less in interest at a current 2.6% rate. This time-frame might not be possible in every area (as house prices vary from city to city), but when property is cheap, houses can be paid for in less than 4 years (I proved this theory just one year ago).
The 100% Cash Option – This one sounds absolutely ridiculous to many, but it’s hands-down my favorite option. In my region of the US, you can still find a fixer-upper for about $70,000. Do you know how you buy a house with cash? You find a dirt-cheap rental for $400 a month above someone’s garage and save up $20,000 a year. After just four years of saving, you can pay cash for your starter home and still have $10,000 for spackle and paint. 🙂
Before you dive into your next mortgage, take a look at the difference between a 15-year mortgage or a 30-year mortgage, and also consider your other short-term solutions. Feel free to use the calculator below to weigh the differences. Good luck to you and your big decisions!
AUTHOR Derek Sall
Derek has a Bachelor's degree in Finance and a Master's in Business. As a finance manager in the corporate world, he regularly identified and solved problems at the C-suite level. Today, Derek isn't interested in helping big companies. Instead, he's helping individuals win financially--one email, one article, one person at a time.