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After the U.S. economy was essentially stopped cold in an effort to prevent the spread of COVID-19, consumer confidence in the housing market sank to levels not seen since the subprime mortgage crisis 10 years ago. Still, there are signs the housing market will continue to see action.
Zillow CEO Rich Barton recently told Barron’s that we’ve “passed the worst of it” and his company will start buying homes again. Citing big growth in site visits and his company’s ability to operate in a socially distant society, Barton is bullish. USA Today reported the real estate markets in Atlanta; Raleigh-Durham, North Carolina; and Austin, Texas actually saw new listings increase in early April compared to a year earlier.
For Americans who still are or could soon be looking to buy a new home, or refinance their current mortgage, a key question will be what type of mortgage term makes sense. Two of the most common options are a 15-year and a 30-year mortgage. Americans largely favor the longer option, with 90% of mortgages lasting 30 years. The 15-year option only accounts for 6% of the market — but that doesn’t mean you shouldn’t consider it, because it would save you money in the long run.
Choosing a 15-year or 30-year mortgage means considering a few factors.
Time it takes to pay off the mortgage
The biggest difference between a 30-year and a 15-year mortgage is obvious: the length of time it takes to pay off your mortgage. With a 15-year term, you’ll be making half as many payments, so those payments will be higher. With a 30-year-term, you’re spreading the amount over twice as many payments—which means you’re paying more interest over time.
Overall, a 15-year term is a better deal. “If someone has the financial capacity to take on a 15-year, it’s at least worth exploring,” says James McGrath, a licensed real estate broker at Yoreevo, a New York City real estate brokerage.
“You typically get a better interest rate by doing a 15-year term,” says Brian Grubbs, president and CEO of Raleigh Mortgage Group, a Raleigh, North Carolina–based mortgage broker. The difference between a 15- and a 30-year mortgage rate can be around 0.5%, according to recent averages.
Over time, that half percentage point can add up to a difference of nearly $100,000.
Here’s the math: on a $250,000 loan, a 30-year mortgage at a 3.33% interest rate would come with an additional $145,648 in interest over the course of the loan. A 15-year mortgage at a 2.77% interest rate would come with an additional $55,808 in interest over the course of the loan.
When you compare the amount of interest you’ll pay over the life of a loan, it’s clear that a 15-year-term is a better deal than a 30-year term.
Impact to equity
Earning equity in a home faster, which you’ll do in a 15-year mortgage, can help you get more back if you end up selling within a few years. If you don’t plan on selling anytime soon, having more equity also positions you to refinance your home sooner, either to get better terms or to cash out some of that equity.
“When you look at each amortization table, you see how much you pay in principal and interest each month,” Grubbs says. “It’s interesting to look at the 15-year mortgage because you cover a lot more ground more quickly.”
The monthly payment of a 30-year mortgage is usually much less compared to a 15-year mortgage because the loan amount is stretched out over a much longer period of time. For many people, that can make a huge difference in being able to purchase a home.
“A lot of first-time home buyers have student loan debt that has to be taken into account,” says Grubbs. “Getting a 30-year mortgage is the difference between being able to buy a house that’s theirs versus not being to get a house at all.”
If you itemize your taxes, any interest you pay on a home loan of less than $750,000 can be used as a deduction, explains Alex Caswell, a wealth planner at RHS Financial. Homeowners who purchased their home on or before Dec. 16, 2017 can deduct interest on up to $1 million of their mortgage.
A 30-year mortgage naturally comes with more interest than a 15-year, potentially leading to a larger deduction. However, only 30% of Americans actually itemize deductions — the rest use a standard deduction, so this benefit doesn’t apply to the majority of taxpayers.
While a 15-year term can save you money on interest in the long term, it will also stick you with a higher monthly payment. So if you’re struggling to build an emergency fund, max out your retirement accounts, or pay down debt, a 30-year term will give you more flexibility each month to hit those savings targets.
|15-Year Mortgage||30-Year Mortgage|
|15-year payment duration||30-year payment duration|
|Lower interest rate||Higher interest rate|
|Higher monthly payment||Lower monthly payment|
|Equity built faster with higher payments||Slower equity building|
|Lower tax deductions||Higher tax deductions|
|Less cash flow to invest||More cash flow to invest|
What Mortgage Term Is Best For You?
- Start with what payment fits your budget. “Most people buy according to a monthly payment,” says McGrath. A 30-year mortgage may help you afford a more expensive house, but that doesn’t mean it’s the best option.
- How much do you plan to put toward a down payment? A larger down payment helps make either a 15-year or 30-year mortgage more affordable in terms of monthly mortgage payments.
- How long do you plan to stay in the home? A shorter loan term helps you build equity in your home faster because the payments aren’t as front loaded with interest as a 30-year mortgage.
- Do you have short-term or long-term goals or plans for your equity? For short-term financial goals that would benefit from tapping into home equity, a 15-year mortgage gets you there faster. A 30-year mortgage still builds equity, but is more suitable for long-term planning.
- How does your mortgage fit in with other financial goals? Factor in your other debts and savings goals when determining the size of your mortgage. The length of your mortgage has a major impact, as does the price of your purchase.