Should you go with a 15 or 30 year mortgage?
I hate surprises and predicting the future wasn’t my thing. But I did know, the rates on fixed mortgages were at an all time low and my motivation for buying a house is to dwell in it and not to flip or rent.
15 vs 30 Year Mortgages
That narrowed the choices to either a 15 year or a 30 year mortgage. The difference is very simple. You get to own your home sooner, pay less money overall with a 15 year mortgage vs having to pay more for a longer period of time with a 30 year fixed loan.
On the flip side, with a shorter term, your monthly payments are higher than with a longer term.
On the face of it, it makes perfect sense to choose the 15 year mortgage if you can afford the higher monthly payments without significantly denting your lifestyle.
Why wouldn’t you want to own a home sooner?
Also consider my temperament. I abhor debt of any kind, be it my car or my credit card. Except for my first car, I always paid upfront for my subsequent buys. I use credit cards, but don’t carry a balance.
Having lived debt-free, it would’ve made perfect sense to pay off the mortgage as soon as possible via a 15 year loan. But after careful consideration, I decided, I’ll choose a 30 year loan. Call me crazy, but hear me out.
Let’s start with the mortgage rates from the Wall Street Journal, as of today
Mortgage Rates as of today from the Wall Street Journal
As you can see, the current rate for a 30 year mortgage is 3.88% and the rate for a 15 year mortgage is 3.16%. We’ll be focussing on these two rates for this little experiment.
Assume the loan amount is for $200,000, no PMI. How much extra will I be paying if I were to choose a 30 year mortgage, but attempted to pay it off in 15 years at these interest rates?
15 Vs. 30 Year Fixed Mortgages
Term | 15 Years | 30 Years With Prepayment | 30 Years |
|---|---|---|---|
| Principal Loan | $200,000 | $200,000 | $200,000 |
| Rate | 3.16% | 3.88% | 3.88% |
| Extra Monthly Payments Paid Bi-Weekly | $0 | $500 | $0 |
| Monthly Payments (Principal + Interest) | $1,396.61 | $1,441.05 | $941.05 |
| Total Interest Paid | $51,389.00 | $61,273.69 | $138,776.65 |
| Total payments | $251,389.00 | $261,273.69 | $338,776.65 |
| Payoff Date | Dec 2026 | May 2026 | Dec 2041 |
Difference - 15 Years Fixed Vs. 30 Years Fixed But Paid Off In 15 Years
Monthly Payments | Total Interest Paid | Total Payments | Payoff Date | |
|---|---|---|---|---|
| 15 Year Loan | $1,396.61 | $51,389.00 | $251,389.00 | Dec 2026 |
| 30 Year Loan Paid Off In 15 Years, Bi-Weekly | $1,441.05 | $61,273.69 | $261,273.69 | May 2026 |
| Difference | $44.44 | $9,884.69 | $9,884.69 | 7 months earlier! |
Why is this awesome?
Let’s see, you pay off a 30 year loan as though this were a 15 year loan. Actually you pay it off 7 months earlier but you pay almost $10,000 more over the life of your loan than a 15 year mortgage. But this extra payment comes with one very important factor:
You now have the flexibility of adjusting your extra payments if you ever have a cash crunch or a job loss, which will not the case with a 15 year loan.
This very important flexibility is worth the little extra you’ll pay over 15 years. The alternative is frightening. If you can’t make your payments on a pure 15 year fixed loan due to a job loss or any other emergency, you risk losing your home.
What’s with the bi-weekly payments?
If you notice, I added this sleight-of-hand trick to the loan. Bi-weekly is making a payment every 2 weeks instead of once a month. On the face of it, doesn’t seem like this would make much of a difference. But you actually save $4589.04 by doing a Bi-weekly payment!
See a year has 52 weeks, which when divided by 4 (4 weeks in a month) gives 13, not 12. You are actually making one extra payment annually which over time, cuts your overall payments by $4589.04 in 15 years!
That’s the power of compounding. Small actions have an avalanche effect over time.
Conclusion
I’ll reiterate – by choosing to prepay a 30 year loan in 15 years, you will overpay by about $10K. But that’s the price you pay for the flexibility of adjusting your monthly payments. Say your car broke down or you had to replace your roof, you can pay just the minimum for that month and make up for it when you get a bonus or when your get your tax refund. I think this flexibility is good to have.
Another factor to consider if you are doing a refinance is to see if instead of paying closing costs, which is usually a percentage of the loan, if it is better to use that money to prepay your existing mortgage. Never rush into refinancing your home.
Mortgages, it’s always a numbers game!
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I actually chose a 30 year mortgage so that our payment would be lower, leaving us with more cash available to pay off some other bills. If we do have extra left, we (sometimes) put it on our principle. A 30-year mortgage doesn’t bother me at all because I know if that there is a possibility for us to pay it off faster.
With the current rates, you can’t complain!
This is exactly what we do. I like the available cash flow.
I’m choosing a 30 years mortgage now too. The rates are so low that I don’t see the point of paying off early. I suspect at some point inflation will get higher than 3.88% and the payment will be feel less painful.
What comes down must go up! You are right, inflation will sneak up on us soon. I wonder if we’ll see these rates again.
Was a 20-year mortgage a possibility? I read an article that talked about the increasing popularity of these “nonstandard” time-frames, apparently the 20-year loan is the 3rd most popular choice behind the 15-year and the 30-year. I think it’s a good compromise between a lower interest rate and some more flexibility.
I know some lenders are offering a 20 year mortgage, but the big lenders aren’t. More choice is always good.
My previous mortgage was 20-year. I told the loan officer that is what I wanted, and she didn’t bat an eye lash when setting up the paperwork. She told me it would go at the 30-year mortgage rate, and I said “fine!”
Smart choice. Major flexibility.
I’d do the same. My mortgage is a 25-year term. If my wife and I can keep it up, the prepayments, we’ll be done in 10-12 years.
Am I EVER going to celebrate when that happens!
Cheers,
Mark
That is a smart strategy! I’m sure champagne will be downed by the gallon when the day arrives when you can call your home your own!
When I refinanced I chose a 15 year mortgage because I wanted my mortgage paid off by the time I retired. I recently thought about refinancing, but my balance is too small even using a 5 year ARM.
If you have sufficient buffer and a stable job with predictable cash flow, you could save a bit by going the 15 year route. Flexibility vs. savings.
The biggest benefit of 30 years is that it allows flexibility for future unforeseen events like job loss, disability etc. As you’ve mentioned, you can still make extra payment if you are disciplined. So, 30 years provides best of both worlds — flexibility and early pay off.
Exactly! Even if I do a refinance it is going to cost a bit in closing costs. Might be better served to use that money as prepayment on my existing mortgage.
If I go for mortgage, I would definitely go for 15 years. Need to be debt free as fast as possible.
Make sure you have enough savings to cover for emergencies.
I am also on a 30 yr that is such low interest, i’m electing to keep the liquidity and not pay it off. One in a lifetime opportunity at current rates.
In these times where credit is hard to come by, liquidity matters. Good choice.
Unfortunately the best variable home loan rates here in Australia are around 6.5% pretty rough when the median house price is around $350K but not as bad as it was a few years back.
I agree that flexibility is super important and worth paying a little extra for. At $10 per week, I think I could live with it.
Hey, but you guys get a good rate on your savings accounts too!
Try 0.05% interest rates that we have to put up with!
Nice analysis. I paid my mortgage off by sending in an extra principal payment with each monthly payment. I really like how you break it down to the basics. Along with everyone else, real estate agents especially should have your piece in their brief case.
Very smart DIY! Must’ve been quite a relief when you paid up your mortgage!
I’ll definitely choose 30 years mortgage. I can surely pay it off every month and I still need some extra cash for savings. 30 years mortgage is ideal for me.
There is some talk that 30 year mortgages may become a thing of the past. Rumors for now…
I’m very happy to pay a small premium for the added flexibility of the 30 year term. As much as I want to wipe out our mortgage we also have many other competing demands for our income. The flexibility helps us move towards funding retirement goals and education accounts.
That’s exactly how I look at it. Small premium for the flexibility.
This is what I’ve been doing with our vacation home. The nice thing about the 30 year is that if an emergency comes around, I don’t have to worry about that fat mortgage payment.
I have read though that only 7% or something of those that have a 30 year mortgage pay it off in 15 years. It’s actually a rather low number.
That is indeed a small number. The power of compounding can work in or against your favor depending on how you use it.
A 30-year mortgage was the way to go for us, also. We’ve been throwing extra money at the principal whenever possible, but now that we have baby, we’ve eased up on our extra payments. Instead of $100 a month, we’re adding $25 a month – which still shortens the term and reduces our overall interest payment. When we’re comfortable again, we’ll increase our extra payment again.
That is exactly my point! When you have an unexpected (or expected in your case!) expenses, a 30 year loan gives you flexibility.
Congrats and thanks for visiting!
The rates are just ridiculously low, but I’m still a fan of paying it off early, preferably with the 15 year. I can certainly appreciate the basis of your decision though. Good post!
The new post caught me off guard b/c I can’t figure out posting schedule LOL
Sorry Roshawn, I really should get disciplined with a schedule!
Ah, I saw right where you were going with this as soon as a I read the title! $10k is so little over the course of 30 years. The flexibility you have as well as the options you have to invest your money in other places could definitely eclipse that amount.
Great analysis MC! I am a huge advocate of unconventional PF wisdom
I used to think the same way, and realized about 8 years ago we’re going to be in a low interest rate environment for a looooooooong time. I like the 5 year ARM due to the rate, and due to the fact that I will pay off my rental prop mortgage in that time frame.
Rates are so low i say go with the 30 year. Now is the time to borrow and spend. Its interesting, during the boom everyone wanted to borrow, rates were higher, homes overpriced. Now that rates are low ,housing is cheaper, inflation will be on its way, the response is…pay off early???
Having the flexibility and the freedom just IN CASE – is paramount in my eyes. We got a 35 year mortgage… and with overpayments and accelerated payments we’re now down to 20 years after only 2.5 years. We will pay it off much faster than planned… but it’s comforting to know that if anything ever happened with our jobs, we could knock the payments way back and still be able to pay our mortgage.
Very nice illustration. The title had me a bit perplexed, but now I get your decision. Very smart!
I hope rates will still be low or lower by next year when i’m ready to buy a house
Thanks Moneycone, I had never thought about mortgages like that before. I’m think I still need a little more convincing. I am currently building a pool of savings and so must any sensible home buyer. Thus I cannot warrant paying the extra 10k. This is because my extra savings give me that flexibility that I need. With savings (as my insurance) I can take the 15 year loan and save 10k. What do you think? Is it simply the case that people should build up a bigger cushion before taking a mortgage?
I think you made the right choice, but your justification for the choice is a bit off. A thirty year mortgage is a great thing at these rates (I wish I could get a 50 year mortgage), especially if inflation returns to its historical averages of 3 – 4% or higher, and if you can invest the difference between the monthly payments for the 15 and 30 year mortgage and earn more than 3.88% on that money you will be much better off than if you’d gotten a 15 year mortgage. Do the math, you’ll see.
I like this strategy; it gives you the flexibility to have the extra cash when you need it, but by making extra payments, you can pay down that 30-year mortgage much sooner. When I finally do buy something, I’ll make extra payments to pay it off sooner.
Why not go for the 40 or 50 year mortgage if flexibility is your game?
Now, don’t get me wrong, I’m with you, too, on the 30 year mortgage, if the true intent is to pay your home off in 15 years. However, I wonder how many people actually make every single extra payment to see this to the end?
Either way, the killer with 30 year mortgages is not necessarily the interest paid to the banks, it’s the relatively huge amount of debt that someone carries if they use the 30 year mortgage to buy more of a home than they actually desire.
In other words, I hope that people who use your principal are purchasing a home with a 15 year mortgage affordability. Simply put, a 15 year mortgage may qualify someone for, say, $150,000, but a 30 year mortgage may qualify him or her for $225,000. So, the 30 year mortgage easily inflates people’s lifestyle beyond their means.
I did not get the math of it. You made one extra payment every year for 15 years. How is the saving of $4589.04 calculated?
hello. any reply anyone?
Every extra payment you make is applied directly to the principal, not interest. If you did not make those extra payment, the interest compounds to this amount over 30 years.