15 vs 30 Year Mortgages: Which is Better?

I’m sure you’re still reveling in my big mortgage primer post from earlier this week. So many mortgages options, so much to learn!

A reader asked me about 15 vs 30 year mortgage terms. When you start looking at fixed rate mortgages, these are the most common loan terms available. Here is a nifty little calculator to illustrate the difference between the two loan types. Enter a loan amount and interest rate (you can check the latest rates here).The calculator will show you how much your monthly payments will be, how much you’ll pay in total over the life of the loan, and how much total interest you’ll pay. (Note that this is a simple calculator, showing only Principal & Interest. For a more robust calculation of your actual costs, check out our Mortgage Calculator page.)

To illustrate the impact of the different loans, plug in today’s rates of 5.0% for a 30 year loan, and 4.5% for a 15 year loan. Enter a loan amount (for a $400,000 home with 20% down, the loan would be $320,000). You’ll see the higher monthly payment for a 15 year loan, but the lower overall cost.

What’s the best choice for a savvy homeowner-to-be?

The answer, a bit frustratingly, is it depends. If you follow one or all of the holy trinity of personal finance gurus (I’m a Suze girl, myself), you’ll get slightly different answers from each:

Suze Orman

Suze Orman says to aggressively pay off your mortgage if you think you’ll be in the same home for the rest of your life. If this is not the home you’re going to retire in, you don’t need to be quite so aggressive. The key is to ensure you can manage the payments now and in the future.

Dave Ramsey

Dave Ramsey says mortgage debt is bad debt, and you should pay it off as fast as you can. He hates 30-year mortgages and advises a short-term fixed rate mortgage, putting as much down as you can manage.

David Bach

David Bach likes 30 year mortgages, but says there’s no reason you can’t make extra payments, or even setup a biweekly payment plan to pay it off sooner (more on this below).

My view is that for first-time homebuyers, the 30-year option is a safer bet. It requires a lower monthly payment, so if life gets crazy (and Lord knows it does, especially when it comes to job changes, relationships, and babies), you aren’t tied to a higher rate. But if you think you’ll be in this home for a long time–even the rest of your life–then do your best to pay your mortgage off before the 30-year mark. You can set yourself up on a 15-year plan and just pay that amount each month (IMPORTANT: ensure your mortgage does not carry a pre-payment penalty, and make sure your bank knows to apply the extra amount to your principal).

This article over on Get Rich Slowly does a great job of weighing the options, and includes examples.

My plan. I have a 30-year fixed mortgage on my Portland condo, but I’ve set up biweekly automatic payments through my bank. This means that half my mortgage amount is deducted from my account every 2 weeks, and over the course of a year I end up paying one extra payment, which goes entirely to principal. At this rate, my mortgage will be paid off 6 years early and I’ll save $48,000 in interest over the length of my loan. I like this plan because I don’t know how long I’ll keep my condo. I don’t want to put all my money into it by aggressively paying it off, but I also don’t want to pay more than I need to in interest. The biweekly plan is a good middle-ground for me.

Everyone’s situation is different, and the right answer for you will depend an a variety of factors. Don’t let the vagueness of this discourage you, however. Spend a little time doing research and reading the articles I’ve linked to; I have faith you can figure out what’s right for you.

In case you like watching rather than reading about finance, I found the below David Bach video helpful in understanding the nuances behind the 15 vs 30 year question. He takes a comfortable middleground and also gives some tips about how to find and evaluate a quality mortgage lender. (I apologize in advance for the hokey music.)