15 vs 30 Year Mortgages

Choosing between a 15- and a 30-year mortgage can be tough, especially when the differences between the two are unclear. A 30-year mortgage will end up having lower monthly costs, but a 15-year mortgage will be paid off in half the time and may save you money in the long run. Let’s unpack each and clear up any confusion:

An Overview:

15-year mortgages will generally have lower interest rates than 30-year mortgages. This means that, in the end, a 30-year mortgage will cost more than a 15-year mortgage. For example, if you have a 30-year, $500,000 mortgage with a 5% interest rate, the monthly payment will be about $2,684. The total amount you’ll spend, however, will be about $966,279 – that’s $466,279 in interest payments. If you have a 15-year, $500,000 mortgage with a 4.2% interest rate, the monthly payment will be about $3,749. This is $1,065 more per month than the 30-year option. In total costs, however,  you’ll end up spending about $674,775, so $174,775 in interest payments – $291,504 less than with a 30-year mortgage. A 15-year mortgage may seem better after the costs are broken down, but there are still a few benefits to choosing a 30-year mortgage.

Things to Consider:

One important question to ask yourself is whether you still have enough money left after your mortgage payment to meet basic needs. Many people look at their paycheck and think they can do this fairly easily, but when they take into account how much money is actually being spent each month, they realize it is not that simple. Experts recommend that you set aside at least six months worth of emergency savings when taking on a monthly mortgage payment, so the extra costs per month associated with a 15-year mortgage may tighten your financial circumstances.

Another important thing to think about is your job security and how easily you could find another job if necessary. If you are fresh out of college and new to your job, it may be a little risky to take on the higher monthly costs of a 15-year mortgage, especially when you take into account the 6 or so months of emergency savings you should have set aside.  Having high monthly mortgage payments may also divert money and attention away from other loans and investment opportunities, like student loans, car loans, and your 401k.

If neither option sounds particularly enticing, it might suit you best to take the 30-year mortgage. You can take advantage of the lower monthly interest payment and even direct some extra money towards the loan principal. This may make the monthly payments less of a burden and can help you chip away at the value of the loan itself.