15 vs. 30-year mortgage: Which is right for me?

If you’re exploring options to finance a house, 15- and 30-year mortgages are two of the most common home loan options.

If you qualify, a 15-year mortgage may help you receive a lower rate and pay less interest overall. But a shorter mortgage term will also likely increase your monthly payment, which may put more strain on your budget.

If you’re trying to decide between a 15- and 30-year mortgage, we’ll review the differences between the two — including the impact on your mortgage rate, monthly payment, total interest, cash flow and buying power. Plus, we’ll offer some alternative home loan options to consider.

• What’s the difference between a 15- vs. 30-year mortgage?
• Am I better off with a 15- or 30-year mortgage?
• What are my alternatives to a 15-year or 30-year mortgage?

What’s the difference between a 15- vs. 30-year mortgage?

In the U.S., a 30-year mortgage is the most common home loan term option. The longer timeline makes monthly payments lower and potentially more manageable, freeing up cash that homeowners can use for other expenses or savings goals.

But because of the longer term, a 30-year mortgage typically has a higher interest rate than a 15-year mortgage. The longer term and higher rate mean you’ll pay more interest over the life of the loan.

Let’s look at an example, using data from Credit Karma’s mortgage calculator. The table below shows the difference in the monthly payments and total interest you’d pay with a 15-year vs. 30-year mortgage if you bought a $450,000 house and put 20% down.

(NOTE: These figures represent the principal and interest you may pay. It doesn’t include taxes, insurance and other fees you may have to pay when buying a house.)

Am I better off with a 15- or 30-year mortgage?

It depends. Both options have pluses and minuses. Here’s a closer look at each.

Pros of a 30-year mortgage

• Your monthly payments will be lower. This isbecause you’re spreading out your mortgage payments over a longer period of time and can be especially helpful for first-time homebuyers who may not have a large down payment saved.
• It may improve your cash flow. You may have more wiggle room in your budget to save, invest or pay for other expenses.
• It may be easier to qualify. Since your monthly payments are lower, you may be able to qualify with a lower income.
• You’ll have more buying power. In general, you can afford a larger mortgage when your payments are stretched over 30 years, allowing you to buy a house that costs more.

Cons of a 30-year mortgage

• Your interest rate will be higher. The average interest rate for a 30-year mortgage is typically higher than the average rate for a 15-year mortgage, so you’ll pay more interest overall.
• You’ll have a longer payoff timeline. It will take you twice as long to pay off a 30-year vs. 15-year mortgage if you make all your payments on time. But you can pay off your loan faster by paying extra each month or making lump sum payments. Be sure the lender doesn’t charge a prepayment penalty, and ensure that any extra funds you pay apply to the principal.

Pros of a 15-year mortgage

• You may get a lower interest rate. The average interest rate on a 15-year mortgage is typically lower than the rate on a 30-year mortgage, so you’ll pay less in total interest.
• Shorter repayment period. You’ll pay off your mortgage and own your home sooner than with a 30-year mortgage — if you make all your payments on time.
• You’ll build equity faster. With a 15-year mortgage, more of each monthly payment is applied to the loan principal, allowing you to build equity more quickly.

Cons of a 15-year mortgage

• Your monthly payments will be higher. Even though the interest rate will likely be lower, your monthly payment will be higher due to the shorter term.
• You may have less cash. With more of your money going toward your monthly mortgage payment, you’ll have less left over for savings and expenses.
• It may be more difficult to qualify. Because of the higher monthly payment, you’ll need a higher income.
• You’ll have less buying power. You may need to buy a smaller, less expensive house to keep your monthly payments affordable.

What are my alternatives to a 15-year or 30-year mortgage?

Taking out a 15- or 30-year mortgage isn’t your only option. Some lenders offer home loans with different repayment terms — typically in five-year increments — such as 10-, 20- or 25-year mortgages.

You may even be able to customize the length of your loan term, giving you the flexibility to choose a timeline that fits your unique financial circumstances.

If you’re comfortable with a monthly payment that may fluctuate, adjustable-rate mortgages are also available. ARMs typically have a fixed interest rate for a set period of time at the beginning of the loan — often three, five, seven or 10 years — and a variable interest rate for the remainder of the term. An adjustable-rate mortgage may be a good option if you don’t plan on staying in your home for the long haul.

What’s next?

The impact a 15- vs. 30-year mortgage can have on your finances may be significant. If you’re planning to buy a house and still aren’t sure which option is best, here are some questions to ask yourself.

• What is your monthly housing budget?
• Do you have a fully funded emergency fund?
• How much are you saving for other financial goals such as your children’s education, retirement and other investments? 
• What is your monthly income?
• What is your debt-to-income ratio?
• How is your credit?
• Is your income the same each month or does it fluctuate?
• How long do you plan to stay in your home?

And no matter what type of mortgage you choose, it’s important to get your finances ready to buy a house.