The 15 vs. 30 Year Mortgage Loan Debate: Why 30 Is Better

According to Freddie Mac’s most recent survey, there is currently a spread of 0.79 percent between the 15- and 30-year fixed rate mortgage benchmarks, which just so happens to be the largest spread since Freddie started tracking the 15-year mortgage 20 years ago; for comparison purposes, the average spread over that same time period has been only 0.47 percent.

I think most people naturally assume that, when it comes to choosing between a 15- or 30-year fixed rate mortgage, the 15-year loan is usually the better option anyway.   Throw in this historic spread, and I’m sure a lot of folks out there are now beginning to think they’d be absolutely crazy to take out a 30-year loan.

On the surface, it makes sense. All things being equal, a 15-year mortgage allows you to pay off your mortgage twice as fast while saving a significant chunk of money on interest.

That being said, I still think the 30-year mortgage is a more logical choice for most people because it has so many more advantages over its shorter-termed cousin.

Here are several big reasons why I think a 30-year fixed rate mortgage is the more pragmatic choice:

1. Lower payments. Of course, the biggest advantage of the 30-year mortgage is that it comes with lower payments that can be used to invest or save as you see fit.   In fact, it doesn’t take a rocket scientist to know that 30-year mortgages are much…

2. More budget friendly. Those lower payments not only take the strain off tight budgets but, if need be, they also allow you to stretch your dollar enough to purchase a more expensive home.

3. Increased flexibility. Two years ago, with my employer in a bit of trouble and potential layoffs looming, I refinanced from a 15-year to a 30-year mortgage in order to lower my monthly payments by over 40 percent. Today, with the layoffs still going on, you can bet I sleep a lot better knowing that my mortgage payment is only $600 per month instead of $1000.

4. More control. With a 30-year mortgage you are almost always free to make additional principal payments necessary to pay off your loan in 15 years without penalty. However, you are never obligated to do so, and can always change your mind as life’s circumstances dictate. With the 15-year loan, you are hopelessly committed to giving that extra money to your lender each month — whether you can really afford to at the time or not. This leads to another big advantage of 30-year loans…

5. Reduced financial vulnerability. By committing to give your lender that additional principal each month you could be needlessly tying up too much of your money into your house. While it’s true that the shorter loan builds home equity faster, you still need a lender’s permission to tap into it with a home equity loan. If I lost my job tomorrow, it is highly unlikely my bank would agree to give me such a loan, making that equity useless to me in time of need.

6. More opportunity for financial balance. Yes, building home equity and getting that house paid off is a noble goal. However, for young people just starting out, there are often other very important financial obligations that need to be addressed too. The higher payments that come with a 15-year mortgage makes little sense if it leaves you unable to build an emergency savings account, or contribute anything to your 401(k) plan, IRA, and perhaps your kids’ college funds.

7. Bigger tax deductions. I can hear all those keyboards banging out the nasty emails to me right now.   Len, you dummy, agreeing to pay more interest in exchange for a bigger tax deduction is like spending a dollar to save a dime. I get it. This should never be the only reason for taking a 30-year mortgage over a 15-year mortgage. However, all things being equal, the larger tax deduction for the 30-year loan does temper the interest savings of a 15-year loan — if only a little bit.

8. Effective inflation hedge. Inflation erodes the value of the dollar over time. As a result, payments made during the last 15 years of a 30-year loan are significantly lower in real terms than the day you first get the loan. That’s why banks hate sustained periods of high inflation: folks with longer-term fixed-rate loans end up repaying those loans with dollars that are worth far less than the value of the dollars they originally borrowed.

No matter how you look at it, the faster inflation rises, the less sense it makes to pay off the mortgage early. With that in mind, a 30-year loan is definitely your best opportunity to stick it to the bank. For many people, I suspect that’s probably reason enough to choose one.

Photo Credit: Casey Serin

Comments

  1. 1

    says

    Outstanding advice Len! That’s exactly what I told my customers when I was in the mortgage business. Take the 30 year loan–to keep the payments at a minimum–but make the payments based on a 15 year term. That way you aren’t locked in to the higher payment should cash become tight.

    It’s especially important given that the job market isn’t as certain as it used to be. The high payment you took on a 15 year loan when you worked at Employer A may be unsustainable if you’re layed off and now working for Employer B.

    The only ways to get out of a 15 year loan is either to refinance it back to a 30 year or to sell the house. You can’t call up the lender and say “I need to go back to the 30 year”.

    • 3

      Nightvid cole says

      But you know, everyone has to have a big house in the suburbs with a lawn that looks like a golf course and a heated Jacuzzi and swimming pool – otherwise is life really worth living?

      (in case this isn’t clear, I’m being facetious and agree with you!!!)

  2. 4

    Spedie says

    After saving for a significant down payment, I bought a house with a 15 year, fixed loan. I am not sorry that I did this when I bought the house in November 2007.

    I have lots more equity than a lot of people that bought at the same time, all other factors being equal.

    I still manage to put nearly 15% into my retirement.

    I still manage to make an extra principle payment of $450 per month.

    I got laid off twice, as a single mom. My emergency fund sustained me until I got another job. In both cases, I got paid more in the jobs – both times. I saw a pay increase….a big one.

    I sleep well knowing my 15 year loan will be paid for in about 12 years time total, then I can take all that money for principle and interest and SAVE MORE for retirement.

    I look foward to those remaining and last years of my working life – I will not be eating Alpo for my main course.

    • 5

      Alexis says

      If you got a 30 year loan and invested the difference between a 30 and 15 year loan, you will end up with more money in the end. A 30 year loan is almost always a better deal. You can’t look at it as which one costs more money in terms of hard dollars, but which one costs more in terms of lost investment income.

  3. 6

    says

    I used to have this same method of thinking — “oh, we should get a 15-year.” I’d run the numbers through a mortgage calculator and see the massive savings in total interest paid.

    Then my boyfriend had a better idea.

    “If you really want to pay off the mortgage quickly,” he said, “get a 30-year, and commit to making payments on it like its a 15-year. You’ll still get most of the interest savings. Granted, your interest rate will be marginally higher — but for that price, you get the flexibility of opting NOT to make those extra payments if you need the cash for something else.”

  4. 7

    says

    Unfortunately, the overwheling majority of first-time home buyers won’t have a choice, because they will only be able to qualify for a 30 year mortgage. That’s what happened to us and it turned out to be a blessing. We pay extra each month and are on schedule to pay it off after 21 years. And, when I was laid off for 6 months, we weren’t stressing over it. We just paid the minimum payment.

    I’m not surprised the 15-year loan is almost 1 percent cheaper than the 30-year. Bankers know inflation is higher than reported in the CPI. And, they know interest rates are going back up at some point.

  5. 8

    says

    It depends on someone’s financial strengths and weaknesses. 15-year is not always bad. On the same token 30-year may be better.

    It used to be 20 years – just one option.

    I bought my previous home in Oct 1985 – 20 year mortgage. We were lucky to pay it off in 8 years. Come to think of it, we just bought groceries, paid utilities and occasional clothes. We were on a financial diet even though we lived better.

  6. 9

    Barb says

    I don’t find any of your arguments compelling.

    1-2-3-5-6 all amount to the same thing: you need a lower payment as a hedge because you can’t really afford the house. 4 is a sign of a bad lender – I currently have a 15-year mortgage with no prepayment penalty. 7 you are wrong – you are arguing that recovering a dime out of a dollar spent JUSTIFIES choosing a longer term loan.
    8 is sound if and ONLY if you are saving/investing the difference in payments EVERY month. Otherwise it’s an excuse to go for a lower payment that is quickly forgotten and then the money gets spent and the advantage lost.

    My mortgage history is a 30 on an easily affordable home, a 30 on a home I could barely afford, and now a 15 on an easily affordable home. Bottom line for me is I am loving the 15 because after 3 years of payments I only have 12 years left rather than 27!!! Really stop and think about this: after paying 5 years I will have 10 years left and you will be facing 25. *cringe* Every month I am building more equity than you and paying out less interest (as a percent of total loan). It is really amazing to watch the balance reduce this rapidly after having had 30 year loans in the past.

    Bottom line, IMHO, if arguments 1-2-3-5-6 resonate for you then probably you bought too much house; next time don’t purchase the MOST house you can afford and those arguments disappear. Go with a 15 year mortgage and the largest down payment you are comfortable with (but don’t tap into your emergency fund for it). My down payment was more than 50% of my home value.

    A 30 year mortgage makes you someone’s slave for THIRTY years of your life. Paying the mortgage off early is a pipe-dream for most people. Somehow after we move in we lose the motivation to make those extra payments, or we need them for maintenance costs etc, etc, etc.

    Here’s another argument against 30 and for 15: at any time that I have a major financial emergency I can refinance my 15 to a 30 and drop that payment amount lower. Can you? With a large down payment I have a huge equity that has been relatively unaffected by the housing price slump, so I can also take out some of that equity if I need to refinance. That is REAL peace of mind, and for me it turns out to have been a better option than putting it in the stock market three years ago.

    Although I disagree with your position on mortgage loan terms I enjoy your blog and would be interested to hear if these counter-arguments change your opinion. Keep up the good work!

    • 10

      Nightvid cole says

      “at any time that I have a major financial emergency I can refinance my 15 to a 30 and drop that payment amount lower. Can you?”

      If you get laid off and have no paycheck, how are you going to refi when no lender will touch you with a ten foot pole? They all want to see that you can actually pay back the loan before they’ll give it to you…

      • 11

        Len Penzo says

        You’re right about layoffs, NC; but to be fair, there are other kinds of financial emergencies that occur not related to job loss.

  7. 12

    says

    We started with a 30 year because that was more affordable. Then, interest rates dropped and we refinanced to a 15 year. The percentage rate was lower, and the monthly payment was not much more than what we were paying on the 30 year mortgage.

    I think if more people did 15 years instead of 30 year loans, we wouldn’t have had as big a housing mess as we have. (People would have possibly had at least some equity in their homes, at least hopefully.)

    Many people plan to make that 15 year payment on a 30 year loan, but often, that extra money is the first thing that is used when the homeowner needs/wants cash.

  8. 13

    Sandy E. says

    Oh, have to agree w/Barb. Re Len worried about losing his job and becoming laid off? If it had been me, and I had that kind of worry, I would have taken out a home equity line of credit, before being laid off, and not refinanced from a 15 to a 30, because you don’t make any payments on the line of credit unless you use it.

    • 14

      says

      But Sandy, with a HELOC I’d be borrowing money at a higher interest rate to help cover my mortgage payments. Why do that when, with a 30-year loan, I could simply dial back the extra payments I was making to pay off my 30-year loan in 15 years? :-)

      • 15

        Nightvid cole says

        Sure, but paying a higher rate on the gap between your emergency fund and a few months’ payments makes MUCH more sense than paying a higher rate on the ENTIRE MORTGAGE BALANCE, no?

        I’d much rather pay 2% APR more on $4000 than pay 0.75% more on $175,000 !!!!

          • 17

            Nightvid Cole says

            0.75% of $175,000 = $1312.50/year

            2% of $4,000 = $80/year

            You seriously think it’s anything but irrational to spend $1312.50 to save $80 ???

            • 18

              Len Penzo says

              If that was the only reason, of course not.

              But I gave eight reasons — not one; so when considering all of them in totality, focusing on that single point to the exclusion of all the others is a bit irrational, don’t you think???

  9. 19

    says

    @Kevin: I’m not surprised you agree with me. We seem to be on the same page on a lot of things, Kev. :-)
    @Derek: Absolutely! Or, even better, do as I did and buy less home than you could afford AND get a 30-year loan. Over the course of a dozen years, I went from a 30 to another 30, then to a 15 and finally back to the 30.
    @Spedie: I think that’s terrific! Still, determined, disciplined people like you can do all of that with the 30-year too while giving yourself the flexibility to change course in midstream if need be. :-)
    @Paula: Exactly my point — I couldn’t have said it better myself!
    @Bret: I think that is a very wise observation about the increasing discount for the 15-year loan. With our ever-expanding government and the Fed’s reckless money printing to cover the costs, a period of high inflation like we last saw in the 70s is inevitable — which is yet another plus for those folks holding a 30-year loan.
    @Doable: Agreed. I would recommend a 15-yr loan only for undisciplined people who want to pay their loans off as early as possible, but are afraid they would blow the extra money left in their pocket by a 30-year mortgage — and that’s only assuming they still have enough money left over to feather their retirement nest egg, as well as money left over to pay for everything else they desire after making the mortgage payment.
    @Barb: Wow. Thank you for the detailed comments, encouragement and very nice words! :-) Although I appreciate your arguments, you didn’t change my mind, Barb. :-) I’m very disciplined with my finances. When I bought my last house I didn’t stretch — I could have stretched and bought a bigger home but I didn’t. We live in a very modest 2000 sq ft home in Southern California. My original payment was almost $1500 in 1997 and through numerous strategic refis, I’ve since dropped that payment down to $600. I’ve also managed to pay down the mortgage from $200k to about $117k today — although I stopped my quest to pay down the mortgage two years ago after I noticed a lack of government enthusiasm to curb its runaway spending. The high inflation that is surely coming because of our high debt will eventually make that $600 payment virtually “free” over the next 25 years. As I mentioned to “Doable,” my position is this: if you are disciplined, that is all the more reason to take the 30-year loan and pay it down as a 15 — why voluntarily give up some of your options and flexibility by committing to the payments of a 15-year loan if you don’t have to? :-)
    @Everyday: You’re right, Kris. Like I said, people who are undisciplined but really want to pay off that mortgage quick should by all means go for the 15. However, us disciplined folks should take that 30 year and pay it down as a 15. Because we ARE disciplined we don’t have to worry about betraying our desire to pay down the mortgage early — so why not take the financial flexibility that comes with the 30-year loan just in case? :-)

  10. 20

    Sandy E. says

    @Len, I was basing my comment on the fact that HELOCs usually come without closing costs so they can be $2,000 to $3,000 cheaper than a mortgage refinance, and because banks offer their lowest rates on shorter-term equity loans, whereas long-term equity loans tend to have rates higher than fixed-rate mortgages.

  11. 21

    says

    Interesting post, Len! There are definitely some firm lines drawn between the two camps. I’m still planning on taking a 15, and plan to pay off my condo in five years, but I think it certainly comes down to each person’s individual levels of self-discipline, risk of investments, liabilities and expenses and a variety of other factors. Thanks for your insights.

  12. 22

    says

    Paying a 25-year mortgage (in our case) in 15 years, that is our goal! We keep the minimum payment low and have a low interest but we pay the mortgage on a weekly basis and calculated with a doubled interest rate. BUT if something would happen to our jobs or any other critical circumstances, then we would still be able to pay the monthly payment for a while.

  13. 23

    says

    I often recommend my clients take a 30 year loan but use the 15 year schedule to make prepayments. I split the difference myself. I took out a 20 year loan and will have my mortgage paid off after 13 years.

    While I was responsible for providing financial help to my mother-in-law, it was a big help knowing that we didn’t have to make larger payments. Now that she’s passed, we’re making up for the years where we made smaller prepayments.

    However, I would add to #2 that the best reason to buyer a more expensive home is if less expensive houses in your market have such steep repair costs that you’d end up spending more in the long run.

  14. 25

    says

    Len, It’s like you are in my head. As we are moving soon and will be taking out a new mortgage, I have been deliberating just those mortgage issues. One point you missed in favor of a 30 year mortgage is this: With mortgage rates at historical lows, there is a possibility that you can take out a 30 year mortgage at 5% and invest the difference between the 30 and 15 year payment in a stock index fund and earn 7-8%/year (should long term averages hold) thereby making a bit more return on your cash.

  15. 26

    says

    @Dan: It’s definitely comes down to what the individual is comfortable going with.
    @DoNotWait: We’re on the same page. I’d do the same thing — assuming I was planning on paying down my mortgage, which I no longer am.
    @Pamela: Yep… it’s all about flexibility. It’s invaluable when you get into a financial bind — or decide that you no longer want to pay down the mortgage because high inflation has reared its ugly head.
    @Jenna: :-)
    @Barb: You’re right. (BTW, I’m looking forward to posting your guest article tomorrow! Stay tuned!!)

  16. 27

    says

    Hi Len, I would agree with you if I had a mortgage. It’s true that a lot of people get the 30 year mortgage so they can stretch into a fancier house, but you didn’t do that yourself. :)

    I think the best reason is #8. Credible estimates of price inflation in the US are running at 6-8% yearly, a lot more than the spread between the 15 and 30 year mortgages. I agree you are better off having that extra money to invest and the flexibility in your budget should you have a financial emergency. You can’t assume that a bank will let you refinance if you are laid off.

  17. 29

    says

    Until Point #8, I was anchored onto my orginal position of a 15-year being a better move. That said, Point #8 is actually a very interesting proposition. You’re paying the same amount, but inflation erodes purchasing power….very true! Over time, that mortgage payment will not seem like as big of a deal, assuming steady inflation. I can see the argument either way.

  18. 30

    says

    Len, you hit all the points, mostly.
    To clarify one – just take your rate and subtract your marginal bracket. 5% mortgage costs say 3.75%. That’s it. You don’t borrow for the sake of the deduction any more than I have a child for the sake of the write-off. But we agree, I believe.
    To the anti-Lens, no matter how conservative a loan, say 10% of income even, the ability to drop the payment to the 30yr rate is an extra guarantee. By the way, I am old enough to recall tbills over 10%. What if Len has a 30 yr mortgage and rates shoot up. Now he takes all his extra money and buys 10% tbills while paying the bank 5%. That sound you hear is Len laughing all the way to the bank. Creepy, I know.
    Barb – a major emergency, and you’ll NOT be able to refi. That emergency may include no income and no bank willing to help.
    Last – When we bought the house, we planned a child. So first five years included a nanny (An American with a masters in early childhood development) whose salary exceeded my mortgage payment. The kid is now 12, college account full up, funded 100% for private school, and the mortgage has less than 7 years left. All planned.
    People have different feelings unrelated to the reality of finance. My feelings have me with no mortgage when my daughter goes to college. That’s my heart. My head says I should have borrowed out every cent I could today for 30 years, as I have confidence I’d beat the 3.75% cost of money.

  19. 31

    says

    @Jennifer: No, I didn’t stretch and buy more house than I could afford. As a result, over a dozen years later, the mortgage is more affordable than ever! (Ridiculously so.)
    @Jeff: I think #8 is not only one of the most important reasons, it is really underrated by most folks too.
    @Squirrelers: Oh, don’t underestimate the power of #8, Wise Squirrel!
    @Joe: Thanks for having my back, Joe! LOL Like I said, I was going for the mortgage pay off until two years ago. My head started telling me a couple years ago to stop it — so I listened. (I just hope my head is right this time.) LOL

  20. 32

    says

    Am I the only one impressed that Len is managing to live in a 2000 sft home in Southern CA for $600/month?

    I know several people who did the same thing (refinanced again to a 30 year mortgage to lower payments to reduce their fixed expenses as a hedge against layoffs). I did the opposite..After I knew I wasn’t going to get laid off, I went into warp speed to pay off our primary mortgage. I didn’t have a ton left on it, so it was an easy decision and I also feel much better having a lower fixed expenses. Different approach but same general idea.

  21. 33

    DC says

    Len,

    Here’s what we did when we bought our current house.

    We owned our previous small house outright, having paid off its mortgage a few years earlier. We did have the funds to put 20% down, but instead we put 10% down, then evenly split the remaining amount: 45% on a 30-year 1st mortgage, and 45% on a 2nd HELOC. This way, we avoided the escrow and PMI requirements for the 1st.

    The 10% saved on the down payment was spent on painting the new house, and doing some fixing up in the kitchen prior to moving in.

    Once the old house was sold, the proceeds were used to pay off the 2nd, a car loan, and the rest socked back for future college funds.

    Meanwhile, on the remaining 1st mortgage, we are making accelerated payments with the money freed up from the 2nd. And as you point out, if times become hard, we always have the option to reduce the payment to the minimum required, which is less than the cost of a 2-bedroom apartment since the loan balance was based on 45% equity in the first place.

    • 34

      Len Penzo says

      Wow. Now that is some clever money management. Just curious, what strategy did you use for paying off your first home and how long did it take?

      • 35

        DC says

        We bought our first small starter home in the early 1980’s, before the Internet and ready-made online financial calculators were available.

        I created a spreadsheet (remember Lotus 1-2-3?) to calculate how much house we could afford. You plugged in your annual salary, it took about 23%, divided by 12 for a monthly payment, subtracted an amount you could vary for an estimated escrow, did a reverse-payment calculation to arrive at a loan amount, then added in 5 or 10 percent to represent varying down payments to arrive at a range of housing prices. You could also enter a range of interest rates too. The results were an eye-opener, and caused us to scale back the houses we were initially looking at.

        BTW, interest rates were a killer back then. We assumed the 1st mortgage at 10%, plus took on a 14.5% 2nd mortgage. Combined, the two had a weighted average of about 11.5%, which was still better than the going rate of 12.5% for a new 1st mortgage.

        When we bought our first small starter home, we could barely afford it, plus we had two car loans and credit card dept. But I was working in the IT field, which was a boom time compared to now. In those days, you could count on a steady job and annual pay-raises to ease the financial pain.

        When my wife became pregnant, we got better organized about our finances. We read financial advice books and created a budget comparable to a paper version of the envelope system. Then we systematically targeted our debts, starting with the credit cards with the highest interest rates, and paid them off one by one. Any money freed up from a payoff was rolled over towards paying off the next target. Then the cars loans were paid off early.

        But the key things are, we researched (libraries and book stores in those days), we did the math, we did not buy more house than we could afford, and we stayed there for 18 years, by which time I was earning more than double what I had when we first moved in. We had both mortgages paid off by year 11, though in fairness that was partially due an inheritance I received that knocked about 3 or 4 years off the timeline.

    • 36

      daniela says

      Hi everyome,
      I am 1 week tp close everything for my first home.
      I am so confuse, i chose the 15 year loan with a 2.875% 0 points and no penalties for paying it off before time, or ballon payments.
      Now, the lender just asked me this

      We are already locked at 2.875% with a 1.9% credit so there aren’t any points, underwriting or processing fees.

      Here are some options: Current credit to you is $2675
      2.75%, lender credit will be reduced to $1689 (by $1k)
      2.625%, lender credit will be reduced to $994
      2.5%, lender credit will be reduced to $290

      Our loan is 140.800 usd since we are doing a 20% down payment. We dont mind paying a bit extra at closing, we just want the best deal but i am so confused.
      Our payment will be 963+ 304 of taxes and insurance. How does this sound to you? 1268 usd per month.
      We just got married, no kids. Our current rent is about same as our future mortgage so we thought it was a good idea to buy a home.
      Please help me,
      We can pay up tp 1500 usd per month, around 50% of my husband salary.

      Thanks
      Daniela

  22. 37

    Mark says

    But if you believe #8 is true … then the strategy promoted in #3 & 34, of making higher payments, kinda mitigates this advantage. To reduce the term of the loan you have to make the bulk of the extra payments early in the term to get max effect. But if you do it early, you have no idea if there is a good reason to not do that because #8 is in effect …

    • 38

      Len Penzo says

      True, Mark. If I could accurately predict/forecast the future with 100 percent certainty I’d be a rich man right now! :-) Alas, I’m not, so it’s all about hedging your bets. At least with the 30 year loan you have the flexibility to more effectively take advantage of those options based upon how you read the macroeconomic tea leaves, so to speak.

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