15-Year vs 30-Year Mortgages

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What makes more sense financially for you, a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage? Both loan types come with their positives and negatives. How do you determine which loan type is best for you and your family? It is all about taking a close look at your finances.

The differences

As their names suggest, the main difference between a 15-year and 30-year fixed-rate mortgage is its duration. If you make your regular monthly loan payments on time every month, you'll pay off a 15-year fixed-rate mortgage loan in 15 years. You'll pay off a 30-year fixed-rate loan in 30.

There's another big difference that comes with these loans: The average mortgage interest rate on a 15-year loan is smaller than it is on a 30-year loan. According to Freddie Mac, the average interest rate on a 15-year fixed-rate mortgage loan stood at 3.19 percent in November 2014. The average rate on a 30-year fixed-rate mortgage loan stood at 4.00 percent during the same period. Both rates are slightly above what they were several years ago, but still historically attractive. However, you'll note the rate on the 15-year loan is much lower than the 30-year rate.

Does that mean that a 15-year fixed-rate loan is the best financial choice? Not necessarily.

Pros and cons

The main benefit of a 15-year mortgage loan is that you'll pay far less in interest during the life of the mortgage. This can save you hundreds of thousands of dollars if you pay off your loan.

For example, if you take out a 30-year fixed-rate $200,000 mortgage with an interest rate of 4.0 percent, you'll pay $143,739 during the life of your loan in interest. If you take out the same loan at the same rate but for a period of just 15 years, you'll pay just $66,287 in interest over the life of the loan.

That is a saving of $77,452 if you would have taken out the 15-year fixed-rate loan.

Again, though, that does not mean that the 15-year loan is necessarily the best choice for you and your family. Even though a 15-year mortgage comes with a lower interest rate, your monthly payment for such a loan will be higher than it would be with a 30-year fixed-rate loan. The reason? In a 30-year loan, the monthly payments are portioned out over a longer period.

Here's an example: For that 15-year fixed-rate loan of $200,000 at an interest rate of 3.19 percent, you'd face a monthly mortgage payment of $1,399. If you instead took out a 30-year fixed-rate mortgage loan of $200,000 at an interest rate of 3.19 percent, you'd pay $863 a month.

The question, then, comes down to this: Can you comfortably afford the monthly payment that comes with a 15-year fixed-rate loan? If so, then taking out one of these loans might be a better choice because you'll waste less money on interest. However, if you cannot stretch your household budget to cover that 15-year monthly payment, a 30-year fixed-rate mortgage loan might be a better choice.