Wondering what mortgage to get when buying your house? After you sift through all the junky options, it usually comes down to deciding between a 15-year vs. a 30-year mortgage. But which one is better?
At Ramsey, we’ve been teaching for decades how the 15-year mortgage is the better option. And the simple reason is because the total cost of a 30-year mortgage is way more expensive.
Let’s look at the numbers!
Simply put, a 30-year mortgage will be paid off in 30 years, while a 15-year mortgage will be paid off in 15 years. No surprises there, right?
Because a 30-year mortgage has a longer term, your monthly payments will be lower and your interest rate on the loan will be higher. So, over a 30-year term you’ll pay less money each month, but you’ll also make payments for twice as long and give the bank thousands more in interest.
On the other hand, a 15-year mortgage has higher monthly payments. But because the interest rate on a 15-year mortgage is lower and you’re paying off the principal faster, you’ll pay a lot less in interest over the life of the loan. Plus, you’ll only be in debt for half the time.
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Let’s look at an example. Suppose you want to buy a $300,000 house and have a 20% down payment ($60,000). That means you need a mortgage for $240,000.
Here’s what your expenses would look like on a $240,000 home loan—whether you chose a 15-year mortgage or a 30-year mortgage:
|
Mortgage Term |
15-year |
30-year |
|
Interest Rate |
3.5% |
4% |
|
Monthly Payment |
$1,716 |
$1,146 |
|
Total Interest |
$69,000 |
$172,000 |
|
Total Mortgage |
$309,000 |
$412,000 |
FYI: We calculated the numbers for both monthly payments on our mortgage calculator using principal and interest only. Then, we calculated the total interest and total mortgage amounts on our mortgage payoff calculator.
As you can see, the 30-year mortgage would have you paying over $100,000 (that’s 33%) more than you’d pay with a 15-year mortgage!
Sure, it feels nice on the front end to save nearly $600 a month by choosing the 30-year mortgage—but your interest rate will be higher and you’ll spend double the amount of years in debt!
Is a slightly cheaper mortgage payment on the front end worth a hundred grand on the back end? No way!
The average interest rate for a 30-year mortgage was around 0.5–1% higher than a 15-year mortgage for the past several years.1,2
One percentage point may not seem like much of a difference—but keep in mind, a 30-year mortgage has you paying that difference for twice the amount of time compared to a 15-year mortgage. That’s why the 30-year mortgage ends up being so much more expensive.
The only downside to a 15-year mortgage compared to a 30-year mortgage is that it comes with a higher monthly payment—but really, that’s a good thing!
With the higher monthly payment of a 15-year mortgage, more of your money will go toward paying off the principal amount of your loan—instead of getting thrown away on interest.
That’s how the 15-year mortgage allows you to pay off your loan in half the time compared to a 30-year mortgage—and avoid a mountain of interest payments.
Some people get a 30-year mortgage, thinking they’ll pay it off in 15 years. If you did that, your 30-year mortgage would be cheaper because you’d save yourself 15 years of interest payments.
But doing that is really no different than choosing a 15-year mortgage in the first place—besides that choosing to make those extra payments would be up to you.
Good intentions aside, this rarely happens. Why? Because life happens instead. You might decide to keep that extra payment and take a vacation. Or maybe it’s time to upgrade your kitchen. What about a new wardrobe? Whatever it is, there’s always a reason to spend that money somewhere else.
When you have a 15-year mortgage from the beginning, you won’t be tempted to use that money for something else. You’ve got built-in accountability to get your house paid off fast!
Here are the main reasons we teach home buyers to choose a 15-year mortgage instead of a 30-year mortgage:
Remember our example from earlier? That 30-year mortgage would cost $100,000 (33%) more than a 15-year mortgage. Imagine what you could do with an extra hundred grand in your pocket by choosing a 15-year mortgage!
One way to build equity (the value of your home, minus what you owe on it) is to pay back the principal balance of your loan, rather than just the interest.
Since you’re making bigger monthly payments on a 15-year mortgage, you’ll pay down the interest a lot faster, which means more of your payment will go to the principal every month.
On the flip side, the smaller monthly payments of a 30-year mortgage will have you paying down the interest a lot slower. So less of your monthly payment will go to the principal.
Guess what? If you get a 15-year mortgage, it’ll be paid off in 15 years. Why would you choose to be in debt for 30 years if you could knock it out in only 15 years?
Just imagine what you could do with that extra money every month when your mortgage is paid off! That’s when the real fun begins! With no debt standing in your way, you can live and give like no one else.
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