Choosing Between A 15 Or 30-Year Fixed-Rate Mortgage?
7 minute read
June 1, 2022


For most Americans, the choice between a 15 or 30-year fixed-rate mortgage isn’t debated for very long. 

In the end, 90% of homebuyers choose the 30-year mortgage option—especially first-time homebuyers.

But regardless of these homeowners going with the majority trend, they might have been better served if they had chosen a 15-year mortgage instead.

Despite the apparent difference in loan terms, these two loan types are very similar. However, with the 30-year loan, your monthly mortgage payments is the more affordable option.

So then, why would you choose the 15-year loan when you pay more immediately?

Let’s look into the details and help you decide which of these fixed-rate mortgages might be better for your financial situation.

The impact of home loan terms

Mortgages are a particular type of term loan secured by real estate. 

During the life of the loan, the borrower will pay interest calculated annually based on the outstanding balance of the principal (loan amount).

The type of loan your choose will affect the affordability of your monthly payments. It’s important to understand the impact of all of your options. 

Weigh the benefits of 15-year vs 30-year mortgage against your own financial situation. 

15-year or 30-year fixed-rate mortgages

Both 15-year loans and 30-year loans are fixed-rate mortgages, meaning the monthly payments and interest rates don’t change. 

When you begin repayment, you will mostly pay the interest portion of your mortgage loan for the first few years.

As the loan amount slowly gets smaller, the interest portion you’re paying shrinks, and you start to pay more of the principal. 

It’s at this point, at about seven to eight years, you’re more directly paying for your home.

15-year mortgage—why shorter terms matter

A 15-year mortgage can be great for buyers who want to pay off their mortgage sooner. 

Shorter-term loans mean higher monthly payments, making a 15-year mortgage more costly at first glance.

Throughout the life of the loan, the shorter term of 15 years could end up saving you more than half of what a 30-year term would cost.

Plus, a lot can happen over 30 years—economies shrink or grow, your health can flourish or deteriorate, natural disasters, etc. 

Because of this, 15-year mortgages are considered less risky for mortgage lenders than 30-year loans.

However, banks make less money on shorter-term loans, so they usually have higher interest rates.

30-year mortgages—why affordability matters

The main advantage of a 30-year mortgage is the lower monthly payments. 

It’s the reason why so many Americans choose this fixed-rate version. But there are some other advantages as well.

  • The lower monthly payment factor allows borrowers to buy a more expensive house than they could afford with a 15-year mortgage. The fixed monthly payment amount allows the borrower to take out a larger loan.
  • A lower monthly payment can allow borrowers to increase their savings or put the money towards possible investments.

The main disadvantage of a 30-year mortgage is how much more you will be paying for your new house in the final analysis.

With 30-year mortgages, your balance will shrink at a much slower rate and—don’t forget—you’re paying the interest off first. 

So if your interest rate is four percent, for example, you will pay 2.2 times more interest payments than the same principal amount under a 15-year loan.

Home loan fine print

Homeowners pay less with a 15-year loan, from a quarter of a percent up to a full percent less. Over the life of the loan, that can add up.

Fannie Mae and Freddie Mac, the U.S.Gov supported agencies that back most mortgages, impose loan-level price adjustments (an additional fee), making 30-year mortgages more expensive.

Those adjustment fees usually apply to people with a lower credit score, smaller down payment, or both. 

The Federal Housing Administration (FHA) charges higher insurance premiums on 30-year loans. And some of these adjustments don’t exist for 15-year loans.

Most borrowers end up rolling these fees into the monthly payments so they don’t have to pay it immediately.

Mortgage calculator example

If a borrower is approved for a $300,000 loan at an annual percentage rate of 4% for a 30-year loan term. The total cost from 30 years of interest payments above the principal is $215,609. Borrowing the same money for only 15 years would cost you $79,441—nearly two-thirds less.

The big downside of this plan is the much higher monthly payments. 

For example, the same hypothetical loan has a 15-year mortgage payment of $2,108, compared to a 30-year mortgage payment of $1,432 per month. That’s a difference of $676 per month.

Paying off your home early also gives that significant investment a chance to appreciate more (assuming your home goes up in value over the years). 

Consider your planned retirement age as well. If you have your home paid off by retirement age, having your home equity available can be a big advantage.

If you can just afford the higher payment, it might be prudent to have some extra cash to put aside for a rainy day.

30-year mortgage considerations

A borrower who can afford the 15-year loan payments may still choose the 30-year mortgage—because they have other uses for the difference in payments. 

For example, homebuyers who start young sometimes invest that extra money in a college tuition fund or a retirement plan that their employer matches.

Prepayment penalty

You might be able to get the best of both worlds, so to speak, if you can afford the 15-year loan payments.

If you choose the longer-term 30-year mortgage but make extra payments, you can pay your mortgage off in 15 years. And, should you run into financial trouble down the road, you can just revert to your required 30-year mortgage payments.

But, if you manage to keep the extra payments for the entire mortgage term, you’ll pay much less interest in the end.

The critical factor will be if your mortgage has no prepayment penalty. A prepayment penalty is a clause that states that a penalty will be imposed if a borrower pays down a significant portion—or pays off—the mortgage. 

In addition, there is a set period in which the clause is in effect, usually in the first five years of the loan.

All mortgage factors

Keep in mind that your calculations should also include that a 30-year term has a higher interest rate. 

And with all mortgage calculations, make sure you add all the costs associated with these types of mortgages, like closing costs and property taxes. 

For example, private mortgage insurance will be added with less than a 20% down payment.

15 or 30-year fixed rate?

Choosing your mortgage product is a decision that can affect your finances for decades. Make your calculations thorough and exact before deciding which way to go.

Furthermore, there are many different kinds of loans. From an adjustable-rate mortgage to VA loans to FHA loans, you can also explore other options. 

There are also the advantages of refinancing those loans at a later date—either conventionally or through one of the government-backed programs (FHA streamline or VA Irrrl).

Regardless of what type of mortgage you’re interested in, the home financing experts at Assist Home Loans can give you expert advice to help you make your decision.

Contact our loan officers today to begin the pre-approval process to see where you stand for a new mortgage and a new home.