15 vs 30 Year Mortgage - How To Decide

Certified Mortgage Advisor
NMLS 1701021
September 25, 2020

How to decide, is it 15 or 30 year?

Now, we're talking about a 30 year versus a 15-year mortgage. We're first going to talk about it's the differences that we're going to go into numbers about how a 30-year loan can actually save you a lot more money than a 15 year with a certain strategy. Then the very end, we're going to talk through three questions that are gonna help you really figure out which option is best for you.

Because we can go into numbers all day long and talk about differences and opportunity costs and all the things that you can consider here. But ultimately, you're just trying to make a quick decision on what's best for you. So we're going to talk through it, go through the numbers and then help you make that choice here at the end.

Differences 15 and 30-year mortgage

So first let's talk about the differences between a 30 year and a 15. So a 30 year is the most common.

30 year loan is cheaper than 15 year loan

Most people go with a 30-year loan. And the reason why is because that payment is lower, right? When we're talking about the 30 years versus the 15, we're talking about how long does it take you to pay back that loan. A 30-year loan is going to be less costly per month than a 15, which is not as common.

Rate difference

Now let's talk about the rate differences here. What we're going to talk through is an example of a $300,000 house with 10% down. On a 30 year loan, this would get you an interest rate of about 2.875. On a 15 year, you'd be looking closer to a 2.5%. So you're getting a lower interest rate with a 15 year loan because it's less risky to a lender.


Now, as far as the payment, you'd be looking at about $1,120 per month. On a 15 year loan, you'd be looking closer to $1,800 per month. So that's a difference here of $680 per month. So you can see that a 15-year loan is $680 more expensive per month, which changes how much you can afford. If on a 15-year loan, you could afford a $300,000 house on a 30-year loan, since your payment is less, you could afford a $400,000 house.


So you have more affordability with the 30 years. You can afford a larger house because the payment is less.

Paying extra

So in a third year, you can always refinance or pay extra people. Sometimes forget that you're probably not going to hold onto that specific loan for 30 years. You'll most likely end up refinancing it. Maybe to drop off mortgage insurance to change the loan type or to lower the interest rate.

Invest at year 16

Now on a 15-year loan, something that's interesting that you can consider is at the end of 15 years, your mortgage is paid off. You don't have that payment anymore, right? You don't have that. Let's say an estimated $1,800 per month payment where you can now go take the $1,800 and invest it in something.

Payoff is up to you

Instead of letting that money. Nothing. So with both of these loans, really the payoff is up to you, right? With a 30 year loan, you can pay it off early, the same thing with a 20 year or 25 or a 15 or a 10-year loan. You can pay them off early. If you want to something that's really beneficial about a 30-year loan.

What can flexibility can do for you

As you have a lower obligation to pay back, right? So if we're talking about in this example, you are obligated on a 30-year loan to pay $1,120 per month. On the 15 year loan, you're obligated to pay $1,800 per month. So what happens when an event like COVID happens and now all of a sudden money is tighter.

It's a lot nicer to have a 30 year loan to have that flexibility. If you need it then to have the 15 year loan and not have that flexibility, that's an extra $680 per month that you have as some wiggle room if you ever need it.

15 or 30 years, how to decide?

So now let's talk about some of the differences through the years. So in over a period of three years, the difference of $5,000. Over a period of 10 years, that's a difference of $25,000. Over 20 years, there is a difference of $66,000, and this is just in the interest cost of these loans.

Then over 30 years, we're seeing a total difference of $83,000. So you can see the interest savings on that 15 years on the surface. It looks a lot better, but what's not being considered here is the opportunity cost when that mortgage gets paid off. Because at the 15 years, you no longer have a payment.

We can invest!

We could take the money and invest it in the same thing. On this 30 year, we have this entire 30 year period where we could take that $680 per month that we would be putting into a 15 year and actually go and invest that. So we're also talking about those strategies.


But first, before we dive into that, let's have a calm moment because it can be really overwhelming to take a look at all of these numbers, because not only are you considering 15 versus a 30 year, you're also looking at different down payments. You're looking at the different lenders, different costs and fees, and everything adds up and it became, it becomes this whirlwind of a bunch of numbers thrown at you.

You don't have to know all the answers. You don't have to figure all of that. Just doing what you're doing right now. The fact that you're going out and looking for more information is putting you way ahead of everybody else, who you're competing in this market with.

Don't be afraid to ask

So just know it is perfectly okay to ask questions to your lender, to your realtor, to look up questions online, and get a general sense for what you're going for the best thing to do.

Simple decision works

At the end of everything, try to make simple decisions. They don't always have to be these decisions based on this really fine, granular, detailed data. Because that is just going to drive you insane and make you question everything at the end of this blog, you're going to get a general idea of, Hey, I think we should go with this option. I think this option is going to work for us and then stick with that. You don't have to crunch every single number in every single scenario because what's going to do is create more anxiety than relief.

3 Options we can consider

So let's talk about three main options. I want you to get it. Now you're going to see tons of different strategies all over the internet for how you can set up and pay back your mortgage. Because you could do a 20 year or a 25 year or 15 your the options are endless. I just want you to consider three main things. If you're looking at a 30 year versus a 15 year, the first one is the difference in paying off.

Difference paying off debt

So if you have high-interest debt right now, like a credit card or student loan or a car loan, then I want you to look at maybe getting a 30-year loan and then taking that extra savings and paying on paying down your debt. Paying down high-interest debt is going to be way more beneficial to you than taking that money and investing it putting it back into your mortgage or paying it as a 15-year mortgage. Once you take care of that high-interest debt before you do anything.

Difference invested in mortgage plus stocks

The second option is looking at taking that difference of the 30 years. So the 30 year had $680 worth of monthly savings. What if we took that and we invested it into the mortgage. So we pay off the mortgage early. We'll actually pay off the mortgage in 16 years. If you take that money and put it back into the mortgage and then take the rest of your savings and put it into.

Difference invested in stocks

Then we're going to look at too, is the difference of if we do a 30 year and for 30 years, we're going to exclusively invest into stocks. The differences here are pretty amazing.

The result after 30 years chart

So we have a chart right here. So let's compare first the 15 years. This is assuming that after the 15 years is done, we're going to invest the rest of the money into the stocks.

15 years

So the 15 plus is investing $1,800 per month. So what our principal and interest payment are into stocks from your 16 to year 30, after the mortgage is paid off, right? Because you're going to pay off your mortgage in 15 years. So let's take what we were paying in our mortgage and invest it into the stock market.

30 years

Now let's talk about taking a 30-year loan, and what we're going to do is invest $680 a month and put it back into the mortgage. What that's gonna do is it's actually going to pay off your mortgage in 16 years, even though you took out a 30-year term, and then after year 16, you're going to take that full payment that you don't have to make any longer, $1,800 per month and invested into stocks for the remaining 14 years.

30 years + stocks

Now, 30 S is investing $680 a month into stocks for 30 years. So those are the three main strategies that we're going to look at here. So first in this first column, we have the total cost. This is estimated closing costs plus interest, plus estimated mortgage insurance.

7% each year!

Obviously, these 15 years have a lot lower cost the 30 years when we're investing an extra amount into it each month, it gets paid off in 16 years. So its interest cost is low to the third year has a really high-interest cost. Cause again, we're carrying all that debt over 30 years.

Now, this investment gain is taking these numbers here from the bottom, and assuming that we invested, into the stock market and earned a return of 7% each year.

How big is the difference when your investing?

In this 15 years, we're looking at an interest gain of about $236,000. On the 30 years, we're looking at 200,000 and on the 30 years investing everything in stocks, you're looking at a gain of $550,000.

That's because you've been saving $680 and putting it into the stock market every single month. You're gaining that compound interest over a period of 30 years to have an incredible amount of gain. Now at the end of 30 years, you've also paid off your home. So you have a real estate asset of $300,000, and we're not going to account for any appreciation or inflation because that kind of muddles things a little bit. We want to talk about everything in today's dollars so we can make a better and easier to understand idea or decision moving forward.

Not just interest, we also contribute into stocks

Then, we can also see the total contributions into stocks. So we have to remember, not only do we collect interest on the money we put into stocks, but we also contributed money into stocks as well.

So 324,000 on the 15 years, 300,000 on the 30 years and a little bit less on the 30 years into the equity, $245,000. When we consider all of these costs, along with the investment gain that we have, we can see that when we do a 15-year loan and we invest after the 15 years is done, we have a total net gain of $798,000, or total net worth of that property of $798,000 when we do a 30 year.

Higher net worth for 30 years!

We pay it like 15 years and then invest once it's paid off $730,000. But here's the winning one. When you take a 30-year loan, and you take what you would pay for a 15 year and then invest it into the stock market for the 30 years, you're going to come out ahead with a net of $950,000.

So you're getting so much more money by going with a 30-year loan. I know there are a lot of numbers in here but take your 30-year loan and see what it would be to change that to a 15 year.

What's the difference in savings that you have there?

In this example, it's $680. If you took that 680 and invested it into the stock market, every single month, you're going to come out ahead so much stronger than if you do a 15-year loan, or if you do a 30 year paid like a 15 year it's because of the rate of return that you're going to get in the stock market is so much better than the interest rate that you're paying on your mortgage, especially when that's compounded over a long period of time.

Your interest rate on your mortgage in this example is running in the high 2% range. That's what interest rates are coming in around right now where your returns in the stock market are going to be closer to 7%.

No need to be afraid, you can be flexible

The short of it is a 30-year-old. Investing the difference into the stock market, into the stock market. It's going to be so much better than a 15 year, and it's going to give you the flexibility to be able to, if you have a month where, Hey, things are a little bit tighter, things like COVID happen. You're able to rein things back in a little bit and have flexibility. You're not obligated to that higher payment. You only have the obligation to the lower payment. Everything else that you choose to do on top of that is extra optional.

Things you need to ask yourself

So some questions to ask yourself if you're considering 30 versus 15 stone on the edge about it.

High interest debt

The first thing is, do you have high-interest debt that you need to pay off? Because you need to do that before you consider investing because your credit card is probably hovering around 20% interest. You need to pay that off before you look at getting 7% interest in an investment account.

Check your DTI, are you comfortable enough?

Also is the 15-year payment comfortable? So if you're looking at a home and let's say it's a thousand dollars a month, but the 15-year payment is coming in around $1,700 per month. If 1700 is too high for you, then maybe you want to look at a lower purchase price home, because you're not going to be able to do these investment strategies.

If you can't afford the 15-year payment, even if you take the 30 years, if the 15-year payment is too high, then you won't be able to invest like this strategy.

Investing into equities and stocks, can you do it?

So if the payment is comfortable, are you comfortable investing in equities and stocks? Are you comfortable learning how to use things like an index fund and taking that money and investing it?

Do your research

If you're not, there are tons of resources available on YouTube and if you research on Google, but if this is something you're considering, make sure you're coming. Saying, Hey, if I'm going to take $680 and put it into the stock market, and are comfortable with how that works.

No need to know what's bearish and bullish

When you invest in the stock market, keep in mind that, this isn't like Wolf of Wall Street. You don't have to be picking single stocks and speculating a very common strategy that works really. Is to look at mutual funds or index funds, something like an index fund is going to track a large group of stocks.

So what you're doing is following a whole group of the economy instead of you speculating on which stocks are going to do well, which is closer to gambling than it has to invest. You're going to track the economy as a whole. And what we've seen over a long period of time is historically the stock market performs very well hovering around seven to 10% gain.

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