Banks offer a dizzying array of mortgage options, and one of the biggest decisions you'll have to make is how long your home loan will last. In other words, you'll have to weigh the pros and cons of a 15-year and 30-year mortgage. We're here to help!
15 or 30 years: What's the difference?
At first glance, the difference between a 15-year and 30-year mortgage seems obvious: The former stretches your home loan payments over 15 years, the latter over 30. But you already knew that.
But here's something you might not know: Since a longer loan life means you can make smaller payments, a recent survey found that 86% of home loan applicants opt for a 30-year mortgage.
Here's how the numbers play out: If you purchase a $300,000 home with a 20% down payment, a 30-year (fixed-rate) loan at the going interest rate (currently 3.68%), it will cost you $1,102 per month for 30 years. Get that same loan for 15 years, you'll be rewarded with a slightly lower interest rate (currently 2.69%), but you'll have to cough up $1,622 -- $502 more per month.
Bottom line? If you can't afford large monthly payments or are worried about not being able to in the future due to job loss, sporadic income, health issues, or whatever other curveballs might come your way, it's understandable that you'd opt for a 30-year mortgage rather than 15. The peace of mind alone could be priceless.
Benefits of a 15-year mortgage
What many homeowners forget to factor in is that a 15-year mortgage may cost more now, but it will save you major cash in interest payments down the road.
"A 15-year loan will save you a ton of money," says Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage."
You might be surprised by just how much, so let's continue with the above example: For a $300,000 home purchased with a 20% down payment, a 30-year mortgage at today's average interest rate (3.68%) will end up costing you a total of $456,708 -- that's in interest and principal -- by the time those 30 years are up. By contrast, a 15-year loan at today's average interest rate (2.69%) will ultimately cost you only $351,933.
In other words, a 15-year mortgage will ultimately save you $104,775 in interest payments -- serious money, which might add up to a very good reason to tighten your belt and give it a try. You can run your own numbers with realtor.com's mortgage calculator to figure out which approach is right for you.
How to save money on a 30-year mortgage
If you can't afford making the higher payments on a 15-year mortgage but like the idea of saving on interest, there are other ways to make that happen, even if you have a 30-year loan.
For one, most lenders don't prohibit borrowers from paying off a loan early, so there's no reason you can't pay off a 30-year loan in just 15 years (or 20, or 25, or whatever you can manage). So if you do find yourself with extra money one month due to a bonus or tax refund, consider putting it toward paying off your mortgage early. You'll save a huge chunk in interest without sacrificing the sense of security that comes with knowing you can easily afford to make your monthly mortgage payments -- and maybe occasionally a little extra.
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Watch: What Your Mortgage Broker Wishes You Knew