The go to fixed rate mortgage term for most borrowers is 30 years, but would you be better off with a 15 year fixed rate mortgage instead? This article explains what factors to consider when deciding between a 15 year mortgage and a 30 year mortgage.

The loans are similar in structure – the main difference is the length of the mortgage term. A shorter term means higher monthly payments, which seem less affordable, however by shortening the term it actually makes the loan cheaper, as you end up paying much less interest over the full life of the loan.

Example on a $500,000 mortgage

15 year fixed rate mortgages are roughly 3% today

Monthly payment: $3,452

Total interest paid to the bank: $121,523

30 year fixed rate mortgages are at roughly 3.75% today.

Monthly payment: $2,315

Total interest paid to the bank: $333,608

Can you afford the higher monthly payment that comes with a 15 year mortgage?

Interest rates on a 15 year mortgage will always be lower than interest rates on a 30 year mortgage, however even after accounting for the lower interest rate, since you are paying your loan off in half the time, you’re monthly payments will be higher. But since you’re paying your principle balance off faster, you’ll save money by paying less interest to the bank over the life of the loan (about 64% less interest in the example above).

Generally, my advice is that if you can afford the higher payments associated with the shorter 15 year mortgage, you have job & income security, at least 6 months of living expenses saved in the bank for emergencies, you pay your credit card bills in full every month, you can still set aside money for retirement, your kid’s college, and other important things in your life, then you should go with a 15 year term. However, if a 15 year mortgage payment means that you have to carry credit card debt monthly, you cannot save money, or invest in anything else important to you, then it’s not advisable.

Are you looking to refinance?

If your current payments on a 30 year mortgage are at a much higher interest rate and your current mortgage balance has been paid down low enough, you might be able to refinance into a 15 year mortgage with monthly payments close to what you were paying, while shortening your mortgage term.

One of the most attractive aspects of a 15 year mortgage is the current difference, or spread, between interest rates on 15 year and 30 year mortgages. Currently, the difference in interest rate between a 30 year fixed rate mortgage and a 15 year fixed rate mortgage is about .75%, and it has ranged historically anywhere between .25% to 1%. In addition, there can price adjustments on 30 year mortgages that don’t exist on 15 year mortgages, which make 30 year mortgages more expensive for borrowers.

How far away from retiring are you?

It’s important to considering how old you are and when you plan on retiring when determining if a 15 year fixed rate mortgage is right for you. If you are in the 20’s to 30’s age range, then it might be best to put your extra money that would go toward paying a 15 year mortgage toward retirement instead. That’s because by saving for retirement early, you let the magic of compounding interest and reinvested dividends grow substantially over a longer period of time.

However, if you are 40 years old or more, then leaning toward a 15 year mortgage may make more sense as you can plan to have your house paid off about the same time you plan to retire; relieving yourself of a mortgage payment during your retirement years. That being said, you still have to weight paying more money toward mortgage debt against the need of saving for retirement, so hopefully you’ve saved a significant amount in your early years, or are making enough money to adequately save for retirement and pay down your mortgage at the same time.

Are you a good saver?

Some people just aren’t good at saving money, and for those people a 15 year mortgage may be a better choice because it forces them to save by way of building equity faster, so the house, which normally appreciates in value, acts a make-shift savings account. Those who choose a 15 year mortgage also save more because they pay less, about 64% less in the example above, in mortgage interest to the bank over the life of the loan.

Best of both worlds

If you cannot afford the higher payment that comes with the 15 year fixed mortgage, then the option that gives you some of the benefit is to take a 30 year fixed mortgage and simply make larger monthly payments as if you took out a 15 year mortgage. If you make the extra principle payments, then you’ll still pay off the mortgage in 15 years and you’ll have paid the bank much less interest than if you made the minimum 30 year payment. If you go this route, then you can always make the minimum 30 year payment if you have unforeseen expenses or lose your job. The only downside is that you won’t get the lower interest rate that comes with a 15 year term mortgage.

The bottom line

Many people would be better off if they opted for a 15 year fixed rate mortgage instead of a 30 year mortgage. It gives you a lower interest rate on the mortgage and the shorter team means that you’ll pay considerably less interest to the bank over the life of your loan. The main factors for it to be advisable for you is that you’ll have to be able to afford the higher monthly payment and still put money toward important things like retirement, your kids college. Of course you’ll need a stable job, at least 6 months of living expenses in the bank, and not carry credit card debt month to month as well. Your age is an important factor and you’ll thank yourself if you don’t have a mortgage payment during retirement.