30 Year Fixed vs. 15 Year Fixed

It’s that time again, where we take a gander at two mortgage products to determine which may better suit certain situations.

While it’s impossible to universally choose one over the other, we can certainly pick out some of the benefits and drawbacks of each.

So let’s look at the “30 year fixed vs. 15 year fixed.”

30-Year Fixed Mortgage More Popular

The 30-year fixed mortgage is the most common loan program available today. Why?

Well, most mortgages are based on a 30-year amortization, meaning they take 30 full years to pay off (mortgage term), and the 30-year fixed never adjusts for that entire duration, making it one of the most simple and straightforward loan programs out there.

In short, it’s safe and easy to wrap your head around, and thus very popular. This explains why it’s heavily advertised and touted by most housing counselors.

But there must be some drawbacks, right? Of course there are.

Mortgage Rates on 30-Year Fixed Higher

First and foremost, you pay a premium for a 30-year fixed vs. a 15-year fixed. Essentially, because you get more time to pay off the mortgage, there is a cost.

For example, mortgage rates on the 30-year fixed averaged 4.63 percent last week according to Freddie Mac, while the 15-year fixed stood at 3.82 percent.

That’s a difference of 0.81 percent, which is certainly very significant.

But before you get ahead of yourself, know that the lower rate on the 15-year fixed comes with a higher monthly mortgage payment.

Mortgage Payment Higher on 15-Year Fixed

On a $200,000 mortgage, which isn’t all that large, you’d be looking at a difference in monthly mortgage payment of $432.52 because it’s paid off in half the amount of time. So the lower interest rate on the 15-year fixed still results in a higher payment.

30-year fixed payment: $ 1,028.88
15-year fixed payment: $ 1,461.40

However, and this is the biggie; you would pay $170,396.80 in interest on the 30-year mortgage over the full term, versus just $63,052.00 on the 15-year fixed!

That’s more than $100,000 in interest saved over the duration of the loan if you went with the 15-year fixed. That’s pretty substantial.

But there’s also a catch with the 15-year fixed option.

Most Homeowners Hold Their Mortgage for Just 5-10 Years

Now obviously nobody wants to pay an additional $100,000 in interest, but who says you will?

Most homeowners don’t see their mortgages out to term, either because they refinance, prepay, or sell and move.

So who knows if you’ll actually benefit long-term? You may have a well thought out plan that falls to pieces in 2-3 years, and those larger monthly mortgage payments could come back to bite you if you don’t have adequate savings.

What if you need to move and your home has depreciated? Or what if you take a pay cut or lose your job? Those larger mortgage payments will be more difficult, if not impossible, to meet each month.

And perhaps your money is better served elsewhere, such as in the stock market or tied up in another investment, one that’s more liquid, which earns a better return.

Make 15-Year Fixed Sized Payments on a 30-Year Mortgage

Even if you’re determined to pay off your mortgage, you could go with a 30-year fixed and make larger payments each month, with the excess going toward the principal balance.

This flexibility would protect you in periods where money was tight, and still knock several years off your mortgage, assuming larger payments were made fairly regularly. And there are always biweekly mortgage payments as well, which you may not even notice leaving your bank account.

In summary, mortgages are, ahem, a big deal, so make sure you compare plenty of scenarios and do lots of research (and math) before making a decision.

Most consumers don’t bother to put in much time, but planning now could mean far less headache and a lot more money later.

Also see: 30-year fixed vs. ARM