Money Match-Up: 15-Year Mortgage Versus 30-Year Mortgage

Money Match-Up

Today is the first in a new series here at Rockstar Finance called Money Match-Up.

This series will introduce financial topics and allow two money bloggers to argue opposite sides of the issue.

From there you can decide which option you think is better or even join the fray yourself in the comments.

Today’s issue pits the 15-year mortgage against the 30-year mortgage. Which is better?

We’ll begin the debate with The Financial Journeyman arguing for the 15-year mortgage.

Here are his thoughts:

A Fifteen-Year Mortgage

In my opinion, there is no such thing as good debt. Some forms of debt, however, are better than others. For example, people should avoid all unsecured debt including credit cards or payday loans. While auto loans are secured based on the value of the vehicle, they too should be avoided if your goal is to save as much as possible and to one day be financially independent.

Homeownership is a major aspect of the American Dream. Many people dream of owning a nice house with a white picket fence. Parents envision raising their children in a safe suburban neighborhood, with good schools, and plenty of other children for their kids to grow up with.

Most people cannot afford to buy a house based on their savings alone. For these folks, they will have to borrow money to purchase a house. Even if they are part of a dual-income couple, most people do have enough liquid assets to simply write a check to pay for a house.

For most people to make their dream of home ownership a reality, they will need to borrow money in the form of a mortgage. What makes a mortgage better than unsecure debt is that unsecure debt offers zero benefits. The benefit of having a mortgage is that it can provide tax benefits like income tax deductions that can reduce your tax liability.

There are many factors to consider when taking out a mortgage. Should you take out a fixed or variable rate mortgage? How much of a down payment can you afford? The focus of this post, however, is based on the term length of a mortgage.

Mortgages have two general term lengths. The two most common term lengths are 30 and 15-year mortgages. Most people take out a 30-year mortgage because of lower monthly payments, flexibility with payments, and low interest rates that can be locked in for a long time.

There are also benefits that should be considered for taking a 15-year mortgage:

Close to Retirement

For those who are close to age 50, a 15-year mortgage is a good option for people who do not want to carry a mortgage with them into their retirement years. Once a person retires, they will be relying on a fixed income to pay their bills. For many people, their last decade of employment is the highest earning period of their career. If a person is age 50 and plans on retiring at age 65, a 15-year mortgage would enable them to pay off their home loan before entering retirement. That would allow them to have more money to enjoy during retirement.

Less Interest Paid

Since a 15-year mortgage is half the length of a 30-year mortgage, the total interest paid would be much less. For simplicity sake, let’s compare a $100,000 mortgage with a 4% interest rate for both a 15-year mortgage and a 30-year mortgage. The monthly payment on the 15-year mortgage would be $740 per month. The 30-year mortgage would be $478. While the monthly payment is less, a person who opts for the 15-year mortgage will end up saving over $38,000 in interest to the lender.

Financial Independence

A 15-year mortgage can be beneficial for people who are working towards reaching financial independence. The money that a borrower saves on interest can be added to their retirement savings accounts. Based on the $38,000 in interest savings in the above example, a person would be able to free up enough money to fund their Roth IRA for almost 7 years. The savings would even be greater on larger loans.

Debt Resistant

Since you are reading this post, you most likely do not like debt. You either do not have debt or are working on paying it off. By taking a 15-year mortgage, the borrower would be in debt for half the number of years compared to those who take out a 30-year mortgage. The shorter-term mortgage also allows the home owner to build equity faster by paying down the principal balance much quicker.

Less Expensive House

The monthly payments on a 15-year mortgage will be more expensive than a 30-year mortgage for the same amount of money borrowed. For most people, that would entice people to buy a less expensive house. The benefits of buying a less expensive house would reduce other homeowner expenses. Most of the time, a less expensive house will have lower taxes, lower costs to maintain the house, and lower costs to heat or to cool the house.

Lower Interest Rates

The interest rate on a 15-year mortgage is generally lower than on a 30-year mortgage. Interest rates are controlled by the Federal Reserve and fluctuate due to economic conditions. We currently are in a period where interest rates are raising. According to Lendingtree.com, the average difference in interest rates between a 15 and 30-year fixed rate mortgage is almost 0.5%.

Conclusion

There are benefits and drawbacks for both 15 and 30-year mortgages. It is truly an individual decision. There are many factors that need to be reviewed before you sign on the dotted line and take out a mortgage. Be sure to perform your due diligence because this is most likely the largest financial decision that you will ever make. If you are buying a less expensive house, can afford higher payments, are close to retirement age, or want to save on interest payments, a 15-year mortgage is an option that you should consider.

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Next we have Michael Dinich from Your Money Geek who starts off getting right to the point…

Why I Hate 15-Year Mortgages

Doesn’t paying off your mortgage in 15 years sound great? 15 years will fly by and then you will magically own the home of your dreams, right? This idea may sound wonderful, however; faster isn’t always better. Before you venture into homeownership, you may want to consider all of the pros and cons of your financial endeavors prior to progressing.

When applying for a mortgage, you can decide between a 15-year mortgage and a 30-year mortgage. Both offer numerous benefits and downsides. But when it comes to the intrigue of the 15-year mortgage, you should proceed with caution.

So, what is a 15-year mortgage?

First, it’s important to understand what a 15-year mortgage may entail. When you receive a 15-year mortgage you pay your mortgage off within 15 years if you have made all payments on time. There is often a fixed interest rate that you carry for all 15 years. Payments tend to be significantly higher than a 30-year mortgage, so you must budget accordingly for this expense.

There are a few benefits to getting a 15-year mortgage such as:

  • You will build equity faster since your payments are condensed.
  • You will pay less in interest compared to a 30-year mortgage.

And this is a faster path to becoming a full homeowner.

In theory, it may sound like a great idea to move forward with a 15-year mortgage. But there are a few downsides that could potentially extremely outweigh the benefits.

What are the downsides to a 15-year mortgage?

Like with any financial decision, selecting a 15-year mortgage comes with some extreme downsides. Some of these downsides include:

  • Taking on higher payments. 15-year mortgages can be 50% higher than 30-year mortgages. You must also factor in your property taxes, fees, and insurance into this payment. Before you know it, your housing cost could eat up your entire monthly budget if you aren’t careful.
  • Receiving less bang for your buck. Since you will have such a high monthly payment, you may not qualify for as much as you would with a 30-year mortgage. If you are looking to stretch your funds, this may not be an appropriate use of your monthly income.
  • Reducing your tax advantages. If you purchase a home from now until 2026 you can deduct interest on a home up to $750,000. With a 15-year mortgage, your interest will be less, allowing for fewer deductions.

But the two biggest downfalls may be associated opportunity cost and the “what ifs” of life.

Opportunity cost is the possible gain of selecting an alternative investment. If you decide on a 15-year mortgage you are tying up a significant amount of cash flow. Let’s say you are not contributing enough to your 401(k) to receive the company match. You are leaving free money on the table. Imagine missing out on 3%-7% of your salary on the table every year.

Or maybe you aren’t maxing out your retirement accounts. This could have an extreme impact on your retirement and tax planning strategies for the future. If you can’t afford to pay your 15-year mortgage and max out your retirement accounts, you may want to stick with a 30-year mortgage.

Another large downfall is the “what ifs” of life. What if your taxes go up? What if your hours get cut? What if you need extra cash? What if you lose your job and can no longer afford the payments? What if there is another opportunity to earn a better return on your investment? Life is full of “what ifs”. You never know when a tragedy will strike.

Banks will not be forgiving and let you start making 30-year payments instead of 15-year payments. If you fall on hardship, you may still be liable for the monthly payment. This could lead to financial devastation if you haven’t planned accordingly.

Additionally, a home purchase is not a risk-free investment. Purchasing a home does not guarantee you will make a profit when you go to sell. If you are forced to leave your home in a down market or rent it out, you may not be able to turn a profit with a 15-year mortgage. If the 15-year mortgage was a mistake, you out of options. Home values don’t always go up, if you need to refinance your mortgage down the road, you could be out of options.

What can you do to pay off your mortgage faster without getting a 15-year mortgage?

Even if you determine a 15-year mortgage isn’t the right solution for you, you can still work towards paying your mortgage off in a timely manner. If your mortgage doesn’t have a penalty for paying it off early, you can put additional income toward your monthly payment.

Let’s say you start a side hustle or receive a bonus from your company, you can put the additional funds toward your payment. This way you aren’t responsible for the higher payment.

If you stay consistent and dedicated to paying your 30-year mortgage off earlier, you could save yourself money and build equity faster.

Do what is right for you

There are some financial situations where a 15-year mortgage makes sense. But overall it could cause you more stress and anxiety than it is worth. There are plenty of other ways to increase you income, create a side hustle, or invest in other form of passive income to pay down your mortgage is a more timely manner. You don’t need to be strapped to a 15-year mortgage to do so.

Weigh out the pros and cons, and make the best decision for you and your family.

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So, those are the two sides of the equation. Which do you think is better for you?

ESI is the owner of Rockstar Finance and writes at ESI Money, a blog about achieving financial independence through earning, saving, and investing (ESI).

He’s an early 50’s retiree who achieved financial independence, shares what’s worked for him, and details how others can implement those successes in their lives. He is also the author of a free ebook titled Three Steps to Financial Independence and spends a lot of his time interviewing millionaires.

Last modified: April 24, 2018

12 Responses to :
Money Match-Up: 15-Year Mortgage Versus 30-Year Mortgage

  1. Stephanie says:

    My vote is a 30 year mtg. It’s funny to see a “30” year since our max in Canada tends to be 25. 30s are rare. Anyways, each mortgage has the option to prepay a percentage annually. You can make extra payments. You can renew your mortgage and speed up the amortization. A 15 year doesn’t give you the same leeway. Plus, there are improvements, updates and maintenance. Why chance it with a too-high payment?
    A housing market is unreliable. Take the extra dough and put it into safe investments. This will create a broader investment strategy.
    What if you have a family during this time? Medical bills? Parents or children need help? We can’t foresee the future.
    Go with the one that gives you the most options, and don’t squander the opportunity. Put the same amount of money away, and you will be just as far ahead without the obligation and fear of default.

  2. I have a 5/1 ARM at 2.625% – this is an option which, if used effectively, can reduce your interest expense drastically.

    Regarding a 30 vs. 15, I like the 15 year mortgage better for rentals because if your renter’s can cover the mortgage and you are cash flowing, you can build wealth very fast.

    I don’t mind having a 30 year note on my primary, but I’m only 25, so my tune may change in the next few years as I look to eliminate my debt.

  3. As usual in personal finance, it depends on your personal situation. When I bought my current home I went with a 30 year because we were about to become a one income family and wanted the lower payments.

    Having a lower interest rate in the 15 was awfully appealing though. As it stands today, I’m plannning to pay off my 30 year mortgage in 15 years. But I’m not making extra payments on it today. I’m saving and investing the difference and plan to pay it off in full all at once when I achieve financial independence.

  4. Bonnie says:

    IMO the best mortgage is the one with the best interest rate. When obtaining my last mortgage I had a lot of fun back and forth with a few banks getting the lowest interest rate offer. Finally it came down to the seven and 15 year, both were the same interest rate and were lower than the 30 or 25.

    My plan was to pay it off in seven years but I took the 15 for flexibility just in case something happened. We paid it off in under seven.

    For rental properties the best mortgage is no mortgage. Pay cash if you can.

  5. Wheeee! Very fun discussion. I think 15 vs 30 depends on the life stage and interest rate of the loan. We started out with a 15 year mortgage ourselves but we refinanced to a 30 year because we were good savers and wanted higher returns for that money per month. Now our mortgage is around $1000 and we invest everything else.

  6. El Jefe says:

    While I appreciate the attempt at a “debate” here, this article left a lot to be desired. Leaving aside the typos and worn-out clichés in the first blog, the second blog defends a 30-year mortgage over a 15-year by telling readers that, among other things, they can qualify for a larger mortgage AND take a bigger mortgage interest rate deduction on their taxes. You desire FIRE? Borrow less. Period. If you have to give up a fourth bedroom or a third bathroom to do it, so be it. Ask that 50-year-old what he or she would have done if they had the opportunity to do it again. Moving on. As for the mortgage interest deduction, I encourage you to read/re-read the new tax law. With the near-doubling of the standard deduction, the vast majority of people will not be itemizing on their taxes starting next year. In other words, most people will not be see ANY benefit to having a mortgage . . . of any length. Unless you enjoy torching your hard-earned dollars for no good reason, aim for a 15.

  7. Jennifer says:

    Go for the 15! We did and crushed through our mortgage debt at a blistering pace. It’s like this: If you have a 30-year mortgage, get out the amortization schedule that came with your loan paperwork. Look at the amount the bank gets (interest) and the amount that goes to paying off your home (principal) with each monthly payment. Your part (principal) will be tiny. This goes on for years and years. More to the bank, less to you.

    With a 15-year mortgage, the very FIRST payment has more going to you (principal) than the bank (interest). And each subsequent month, the gap opens wider. Pretty soon, a huge chunk of your payment is attacking the debt and the bank gets less and less.

    After five years of doing this with a 15-year, we decided to relocate to take advantage of a LCOL and be near family. Between our home equity we gained from the 15-year mortgage paydown and the rising cost of homes in our area, we netted enough money on the sale to purchase a home in cash in our new location.

    Living without a mortgage is the most fantastic feeling. I highly recommend it. And starting with a 15-year mortgage is a great way to get there.

  8. I gotta go with the 30 year on this one. I can’t be tied down to those inflated payments. You can always overpay if you have extra cash laying around to shave a few years off.

  9. Josh says:

    We took a 15-year mortgage because we could afford the extra payment. After seeing how much interest we were going to pay, we decided to make extra payments and pay it off early.

    We’re the exception to the rule, but have the peace of mind of being debt free was more valuable than the potential investment interest we’d earn long-term instead. This is partly because we have careers in niches that are more cyclical and affected by the credit cycle. Going debt-free into the next recession/ bear market is a huge plus for us.

  10. I’m looking to buy my first home next year so this is something that I have considered quite a lot.

    And I think the answer is – it depends on your personal circumstances.

    It also depends on your cash flow, the difference in interest rates, your emergency cash cushion (should anything come up that would impact said cash flow) and your future goals. If you are young and planning and don’t plan to move anytime soon, and need the extra cash flow, then a 30-year mortgage makes more sense and seems less risky. With a 15 year mortgage you would need to have confidence your cash flow can keep up with payments and not put you in the red, even under stressful circumstances.

    I’d go for the 30 year mortgage, personally.

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