15 Year Fixed Mortgage vs 30 Year Fixed Mortgage

Traditional 30-Year Mortgage

The fixed-rate, fully amortizing mortgage loan has been the standard of the real estate finance industry for the past 50 years. A 30-year term provides a reasonably low payment for the amount borrowed, while the interest rate, payment amount, and repayment schedule are set permanently at the beginning of the loan period. Fixed-rate loans often are sold in the secondary market because they appeal to pension funds and other investors searching for a relatively safe investment with a known interest rate and a long duration.

Advantages of a 30-year mortgage 
Monthly payments on the loan are spread over 30 years, offering the borrower protection against future increases in interest rates and inflation rates while providing for the orderly repayment of the amount borrowed. Household budgets are easier to manage when the borrower does not have to plan for changing payment amounts or interest rates.

Disadvantages of a 30-year mortgage 
If overall interest rates drop, as they did in years 2000–2001, the rate on a fixed-rate mortgage will not go down with them. To take advantage of lower interest rates, the original loan must be refinanced, requiring the borrower to pay substantial closing costs on the new loan.

15-Year Mortgage

The 15-year fixed-rate mortgage has become popular with both lenders and borrowers in recent years. It is just like a traditional 30-year loan, except that its monthly payment is higher, its interest rate typically is slightly lower, and it is paid off in 15 years. The 15-year mortgage saves the borrower thousands of dollars in interest payments.

The popular press sometimes compares the two mortgage plans, showing dramatic savings from the 15-year plan. The gross savings, however, usually are overstated. The higher payments on the 15-year plan have an opportunity cost. If the difference were invested, the return on the investment would reduce the net cost of the 30-year mortgage. The tax savings from mortgage interest deductions also would reduce the savings.

For many borrowers, the 15-year mortgage may be the best way to finance a home because, in addition to the overall savings in total cost, it forces a monthly saving in the form of extra equity and allows a person who needs it a sense of confidence that her home will be paid off in 15 years. This is true for those planning for retirement.

The 15-year mortgage robs the borrower of some flexibility. A 15-year mortgage cannot be extended to 30 years, but a 30-year mortgage can be paid off in 15 years if the borrower accelerates monthly payments to create a 15-year loan or remits a lump-sum payment on principal each year. The borrower retains the right to decide when, or if, he will make extra payments. Borrowers must evaluate the benefits of the 15-year mortgage based on their personal situations.

Advantages of a 15-year mortgage 
Because lenders get their money back sooner than they do with traditional 30-year mortgages, they charge slightly lower rates for 15-year loans. Also, the loans are paid off faster, less money is borrowed for less time, and less total interest is paid over the lives of the loans. As with a 30-year, fixed-rate loan, the interest rate on a 15-year mortgage does not change, and the monthly principal and interest payment does not go up. Finally, the higher monthly payment results in forced savings in the form of faster equity buildup.

Disadvantages of a 15-year mortgage 
The monthly payment on a 15-year loan is higher, and the borrower forgoes investment opportunities voluntarily for the extra dollars paid on the loan each month. Some income tax advantages related to home mortgages and investment opportunities are lost.