15-year vs 30-year Mortgage Calculator 2023
Every mortgage has a mortgage term. Some programs will allow you to choose a unique mortgage term but for most mortgage programs including both private and government-backed, you are limited to a choice between a 15-year or 30-year term. This choice is critical and you should consider multiple factors before making a decision. With a different mortgage term, only your principal balance payments and total interest expense change because your Property Tax, Homeowners Insurance, and HOA fees stay fixed whether you have a mortgage or not. Other considerations include the flexibility of a 30-year mortgage and the cost of refinancing.
Monthly Payment
15-Years vs 30-Years
What You Should Know
- 30-Year mortgages are more popular than 15-Year mortgages since they offer lower monthly mortgage payments which makes them more affordable
- You end up paying more in overall interest expenses with a 30-year mortgage since the principal balance decreases slower
- If there are no prepayment penalties, you can choose to take out a 30-year mortgage and make extra principal payments throughout it to save money on interest and pay off the loan earlier
Comparing a 15-Year and 30-Year Mortgage
| 15-Year | 30-Year | |
|---|---|---|
| Interest Expense | Less interest to be paid | More interest to be paid |
| Mortgage Rate | Lower mortgage rate | Higher mortgage rate |
| Mortgage Payment | Higher | Lower |
| Flexibility of funds | Less flexibility | More flexibility |
| MIP rate for FHA loans | Higher | Lower |
| Loan Level Price Adjustments | Fewer fees | More fees |
15-Year vs 30-Year Mortgage Comparison
Principal Balance
The primary benefit to a 15-year mortgage vs a 30-year mortgage is that each month, you are paying off more of your principal balance. You may think that to reduce your mortgage term by half, you have to pay twice as much each month, but you actually pay much less than that.
With a $350,000 mortgage, a 20% down payment, and a 3% interest rate, the monthly payment on a 15-year mortgage is $1,934, while the payment on a 30-year mortgage is $1,180. Therefore, you don’t have to pay twice the amount, rather than $754 more to reduce your mortgage term to 15 years. Every additional dollar you add to your monthly payment is used to directly pay off your principal balance. This advantage is used when you make early mortgage payments.
By paying off more principal, with a 15-year mortgage, you also get to build equity quicker. The equity you own in your home can be used to borrow more against it and pay for projects such as home renovations and improvements.
Interest Expense
Your mortgage rate remains constant whether you get a 15-year or 30-year mortgage. However, if you pay off your principal amount faster, there will be less interest expense. This is because your mortgage rate only applies to the remaining principal balance of your mortgage. For example, you do not pay interest on your down payment amount because you are not borrowing that money. This is where your actual savings throughout your mortgage term come from. Using an amortization calculator, you can see that when reducing your amortization length, only the total interest cost decreases.
Mortgage rate
Mortgage rates on 30-year mortgages are typically higher than the mortgage rates on 15-year mortgages. Lenders do this for two reasons. First, it costs lenders more to make and maintain longer-term mortgages than shorter-term ones. Secondly, a 30-year mortgage presents a higher risk of not being paid back than a 15-year mortgage. Lenders make up for this risk and increased cost by charging a higher interest rate. Therefore, besides paying more interest over time because of the length of your mortgage and remaining principal balance, the interest rate itself also contributes to making a 30-year mortgage more expensive than a 15-year one.
Some countries, such as the UK, Canada, and Australia, have much shorter mortgage terms. You’ll usually get a mortgage in these countries with a term of five years or less, while the mortgage itself is amortized over a much longer period. That’s one reason why mortgage rates in Canada are lower than U.S. mortgage rates.
Flexibility
While it seems like a 15-year mortgage is great if you can afford it, a 15-year mortgage has downsides as well. With most mortgages, you can make early mortgage payments in addition to your monthly payments that can reduce your mortgage term. However, if you get a 15-year mortgage, you cannot extend your mortgage term because you would just be missing payments.
You can also refinance your 30-year mortgage into a 15-year mortgage if your income increases in the future. Doing this may involve some refinancing costs. However, you have the option to wait before shortening your mortgage term instead of locking yourself into a 15-year mortgage. Before signing your mortgage contract or agreeing on mortgage terms, always ask your lender about the conditions associated with paying off your mortgage early. 30-year mortgages provide a significant amount of flexibility compared to a 15-year loan only if you can take advantage of potentially making additional payments. If your mortgage payments are flexible, you are not locked in for 30 years but instead, you have a mortgage that starts with a 30-year term.
Loan level price adjustments
Government-sponsored agencies, such as Freddie Mac and Fannie Mae, that back most conventional mortgages charge fees to lenders for buying these mortgages. The fee that they charge depends on how risky the mortgage given out is. Adjusting these fees for the level of risk is what loan-level price adjustments are. Therefore, riskier mortgages have higher LLPAs. Lenders pass on these fees to the borrowers, which hence makes 30-year mortgages even more expensive than 15-year mortgages.
Mortgage Insurance
Borrowers who make a down payment of less than 20% have to pay for Private Mortgage Insurance for conventional loans. For FHA loans, you have to pay for Mortgage Insurance premiums. How long you pay for MIP depends on whether you put at least 10% down or not. FHA lenders charge higher MPI rates for 30-year mortgages than for 15-year mortgages. For example, if you have a mortgage of $700,000 and your LTV ratio is 95%, with a 30-year mortgage, your annual MIP rate would be 0.8%. On the other hand, everything else the same, the annual MIP rate would be 0.45% for a 15-year FHA loan, which is almost half of the rate that you would pay for a longer-term mortgage.
The 30% Rule
Balancing the mortgage affordability and interest savings may seem ambiguous, but government-backed agencies give home buyers a recommendation for mortgage amounts. The 30% rule recommends that your mortgage payments should be at most 30% of your annual income before taxes. If with a 15-year term, your annual mortgage payments are less than 30% of your gross income, you should get a 15-year mortgage because you can save on interest with low risk. Your income is high enough that you can make large payments towards your mortgage and still have enough leftover for other expenses. Otherwise, you should get a 30-year mortgage and make early mortgage payments. You can also refinance later when your financial situation improves. By only using 30% of your income for your mortgage payments, you ensure that you have a suitable amount left to spend on other aspects of your life and you can save in case of an emergency.
Example - The 30% Rule
You want to purchase a house that costs $300,000 and you can make a 20% down payment on it. The mortgage rate is 3% and your monthly income is $3,000. Which mortgage term should you choose based on the 30% rule?
| 15 - Year Mortgage | 30 - Year Mortgage | |
|---|---|---|
| Annual Salary (12 x $3,500) | $42,000 | $42,000 |
| Monthly Mortgage Payment | $1,657 | $1,012 |
| Annual Mortgage Payments | $19,884 | $12,144 |
| Mortgage Payments ÷ Annual Salary | 47.34% | 28.91% |
| Does it fulfill the 30% Rule? | No | Yes |
Based on the 30% rule, you should choose the 30-year mortgage since it offers mortgage payments that are less than 30% of your total income.
A third alternative
If you want to enjoy some of the benefits of a 15-year mortgage, however at the same time you don’t want to risk not making the mortgage payments in the long run, then there is a third course of action you can take. Assuming there are no prepayment penalties, you can take out a 30-Year mortgage and make the payments you would otherwise have made for a 15-year mortgage.
Example - Making the payments of a 15-Year mortgage for a 30-Year mortgage
Imagine that you want to purchase a house that costs $250,000 and you make a 20% down payment. Your mortgage rate is 3%. With the level of your income now, you can afford to take out a 15-Year mortgage. However, you are not sure if you will be able to make these large payments in a couple of years. Which option should you choose?
| 15-Year Mortgage Payment | 30-Year Mortgage Payment |
|---|---|
| $1,381 | $843 |
| Difference → $538 | |
You can take out a 30-Year mortgage and make an additional payment of $538 every month, assuming there are no prepayment penalties. This amount will be applied to your principal balance and will allow you to pay off your mortgage in 15 years.
The method has a number of advantages. If you are on a tight budget, you do not have to worry about not being able to make the large payment, because the lender only requires you to make the 30-year mortgage payment. However, doing this means you won’t be able to profit from the lower fees and typically lower mortgage rate than a 15-year mortgage can offer. Therefore, while you will be saving in interest by making extra principal payments, you won’t be saving the amount that comes from the difference in mortgage rates.
Investing the Difference
Instead of making extra principal payments, you can also invest the money that you save monthly when taking out a 30-year mortgage instead of a 15-year one. This can only be profitable if the investments you make generate higher returns than what you would have saved by taking out a 15-year mortgage. In other words, the return rate after capital gains taxes should be higher than the interest rate owed on the 30-year mortgage. If you are not sure if you would be able to generate more income by investing, then it would be a safer option to take out a 15-year mortgage and save on the interest expense.