The trade in one line
A 15-year loan costs more each month and much less in total. A 30-year loan costs less each month and much more in total, and leaves you owing more for longer. Which suits you depends on how much payment you can commit to every month for years, not on which number looks better.
An example
$320,000 borrowed, at the rates the calculator starts with: 6.5% over 30 years, 5.75% over 15. Lenders usually price 15-year loans about half a point to three quarters of a point lower, because they get their money back sooner.
| 30 years at 6.5% | 15 years at 5.75% | |
|---|---|---|
| Payment (principal and interest) | $2,022.62 | $2,657.31 |
| Total interest | $408,141 | $158,317 |
| Total of all payments | $728,141 | $478,317 |
| Still owed after 7 years | $289,332 | $204,094 |
| Interest paid in those 7 years | $139,232 | $107,308 |
The 15-year loan costs $634.69 more a month and saves $249,824 in interest over the loan. Even if you sell after seven years, it has $85,000 more of the house paid off.
What if you take the 30-year and pay extra?
This is the usual middle road: the 30-year's lower payment is what you're obliged to pay, and you send more when you can. It works, but the higher rate costs you.
- Paying the 15-year payment ($634.69 extra) on the 30-year loan finishes it in 16 years 4 months with $199,645 of interest: $41,300 more than the 15-year loan, because the rate is 0.75 points higher.
- To finish the 30-year loan in exactly 15 years you'd pay $764.93 extra a month, a payment of $2,787.55: more than the 15-year loan's own payment, for the same 15 years.
So the extra-payment route buys flexibility, and pays for it. What you get for that price is a lower payment you're committed to if work dries up or a roof needs replacing. Try it under “Extra payments” on the extra payment calculator.
A 20-year loan, in between
Many lenders also write 20-year loans, usually priced between the two. The same $320,000 at 6.25% over 20 years is $2,338.97 a month with $241,353 of interest: $316 more a month than the 30-year, and $167,000 less interest. Change a loan's term in the comparison above to see it with your own rates.
What to weigh besides the total
- What you must pay each month. The 15-year payment is the one your lender expects every month for 15 years. The 30-year's lower payment is a floor you can always exceed.
- How much house you can buy. On the same income, the higher 15-year payment qualifies you for less. The affordability calculator shows the difference.
- Other uses for the money. Higher-rate debt, an employer retirement match, or an emergency fund with nothing in it usually deserve the money before extra principal does.
- Mortgage insurance. With less than 20% down, a 15-year loan reaches the 78% and 80% points where mortgage insurance ends much sooner, which is a real saving on top of the interest.
- The tax deduction. Less interest means a smaller mortgage-interest deduction, if you itemize at all. The deduction returns a fraction of what the interest costs, so it never makes paying more interest the cheaper choice. The calculator's tax estimate shows the size of it for your situation.
Common questions
Is a 15-year mortgage always cheaper?
In interest, yes: less time and usually a lower rate. In monthly cost, no, and that's the part you have to live with.
How much lower is the rate on a 15-year loan?
Usually about 0.5 to 0.75 points, though it moves with the market. Put the two rates your lender quotes into the comparison above rather than assuming a gap.
Can I switch from a 30-year to a 15-year later?
You can refinance into one, which means new closing costs and whatever rates are then, or you can pay extra and finish early without changing the loan. The refinance calculator shows whether the switch pays for itself, and the payoff calculator works out the extra to be done by a date you pick.
What if both loans have the same rate?
Then the difference is only time: the 15-year still saves a great deal of interest, but paying the same extra on a 30-year loan gets you the identical result, with a lower required payment. A rate gap is what makes the shorter loan the better deal rather than just the faster one.
Does the calculator count taxes and insurance?
It can. The figures above are principal and interest only, which is what the term changes. Property tax, homeowners insurance and mortgage insurance are the same either way for the same house, though mortgage insurance ends sooner on the shorter loan.