Learning Center: Pros and Cons of 15- and 30-Year Mortgages

In our Fundamentals series, Rate Simple breaks down loan concepts for ordinary people.

Owning your home outright after just 15 years. What an appealing idea! Some of us have shirts older than 15 years. The trade-off is, of course, higher monthly payments. A home buyer considering a 15-year mortgage should make a careful assessment of income and finances.

No one has a crystal ball to see 15 years ahead, much less 30, but if your career is stable and you see no dark clouds on the horizon, then committing to a larger monthly payment will get you to the finish line sooner. Guessing where you'll be in life in 30 years can be overwhelming; 15 years is easier to predict.

The table shows a breakdown of 15- and 30-year mortgages.

You Will Pay Much Less Interest With a 15-Year Mortgage

Every payment toward the loan principal buys you a bit more of your home, whereas payments toward interest go right into the bank's overstuffed pockets. This idea irks, to the point that most people put it out of their mind.

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If you are confident about your ongoing income and wouldn't be neglecting other smart financial moves (retirement savings, college fund, emergency savings), then the larger payments of a 15-year mortgage come with the satisfaction of knowing that more of your money is going toward the house than the interest.

So does this describe you?

• Solid career outlook
• Healthy debt-to-income ratio
• Good savings practices

If so, you recognize the appeal of a 15-year mortgage, so much appeal that you might consider buying a less expensive home if it makes the difference between signing on for 15 years or 30.

When 30 Years Makes More Sense

A 30-year fixed-rate mortgage is the most common for a reason. Why so? Let's start at the reason that grabs most prospective home buyers: the lower monthly payments. The fixed rate means the payments are predictable, too.

The reasons considered after that are that you get to claim the mortgage interest deduction on your taxes for 30 years instead of 15, and that the money you save in lower mortgage payments will be put toward retirement and other smart savings.

Plus, you can always pay more than the usual amount on those months when you're able, thus "customizing" the actual length of the 30-year loan.

Takeaways

• 15-year mortgages are for people who have good reliable income and their other financial ducks in a row.
• 30-year mortgages are for people who want a lower payment and the wiggle room to make other smart moves with the money this leaves in their pocket.
• We at Rate Simple strive to design the right loan for your needs.