15-year vs. 30-year mortgage: what the lower payment really costs

The two most common mortgage terms in the US are 30 years and 15 years. The choice between them is one of the biggest financial decisions in buying a home, because it trades a lower monthly payment against a dramatically lower total cost. Neither is right for everyone, but the numbers make the trade-off very clear.

The same loan, two ways

Take a $300,000 loan. Fifteen-year mortgages usually carry a lower interest rate than 30-year loans, so for this example assume 6.25% for 30 years and 5.5% for 15 years. (Rates change constantly; these are just for illustration.)

• 30-year at 6.25%: about $1,847 a month, and about $364,975 in total interest over the life of the loan.
• 15-year at 5.5%: about $2,451 a month, and about $141,225 in total interest.

The 15-year loan costs about $604 more each month. Over the full term, it saves more than $220,000 in interest. You also own the home outright 15 years sooner.

Why the difference is so large

Two things work together. First, the 15-year loan usually has a lower rate. Second, and more important, you're borrowing the money for half as long. On a 30-year loan, the balance shrinks slowly in the early years because most of each payment goes to interest. In the example, the very first payment on the 30-year loan includes about $1,563 of interest and less than $300 of principal. The amortization guide explains why.

The case for 30 years

A lower required payment gives you flexibility. It can make the difference between qualifying for a home or not, and it leaves room in your budget for emergencies, retirement savings, and other goals. If money is tight in some months, a smaller mandatory payment is a real safety net.

A 30-year loan also doesn't stop you from paying it off faster. Most US mortgages have no prepayment penalty, so you can pay extra whenever you like. In the example, adding $300 a month to the 30-year payment pays the loan off in about 21 years instead of 30, and cuts the total interest to roughly $237,700. You'd still pay more than with the 15-year loan, because of the higher rate, but you keep the option to pay only the required amount in a tough year.

The case for 15 years

If the higher payment fits comfortably in your budget, the savings are hard to beat. The lower rate and shorter term both work in your favor, and the fixed schedule removes the temptation to skip extra payments. Many people like the idea of being mortgage-free before retirement or before children start college.

Equity also builds much faster. That matters if you need to sell in the first several years, since you'll have paid down much more of the balance.

Questions to ask yourself

1. Can I afford the 15-year payment and still save for emergencies and retirement?
2. How stable is my income?
3. Would I really make extra payments on a 30-year loan, or would that money get spent?
4. Would the extra money earn more if invested elsewhere, after accounting for risk?
5. How long do I expect to stay in the home?

Try your own numbers

Terms like 20 and 25 years exist too, and fall between these two. Use the mortgage calculator to compare terms at the rates you're actually being offered, including taxes, insurance, and extra payments. Seeing the total interest side by side is often what settles the decision.