30 Year Mortgages vs 15 Year Mortgages

There are several different types of mortgage loans available to homebuyers and homeowners who are refinancing their current mortgages.  30 year mortgages are the most popular. When figuring out which loan is best for your situation, the first thing you should decide on is whether or not you want a loan with a fixed mortgage rate or an adjustable mortgage rate.

After deciding on the type of rate, you then have to decide on the term of the mortgage loan. Terms vary from as short as 1 year mortgage for an adjustable rate loan and as long as 30 year for a fixed rate loan. Mortgage rates today on all types of loans are just above record lows, so right now is a very good time to buy or refinance your current mortgage.

30 year mortgagesThere are some advantages to all types of loans and figuring out what is best for your situation will help you determine which loan fits your needs. The biggest factors to consider are how much the monthly mortgage payment will be and how long you plan to live in the house.

30 Year Mortgages Most Popular

By far, the most popular loan types are fixed rate mortgages because the mortgage interest rate on the loan never changes and as a result, the monthly mortgage payment of principal plus interest (P+I) never changes. The monthly payment can change if you have property taxes and homeowners insurance escrowed into the payment. 30 year mortgages are the most popular, the second most popular loans are 15 year mortgages.

In a recent refinance report released by Freddie Mac, 95 percent of those refinancing chose a fixed rate mortgage over an adjustable rate mortgage.

There are several different terms on fixed rate loans, the most popular terms are 30 years and 15 years. There are many lenders that also offer 20 year loans and 10 loans. During the housing boom when home prices were rising very quickly, some lenders also offered 40 year loans but those are almost non-existent these days.

Adjustable Mortgage Rates Better for Suited for Short Term

Adjustable mortgage rates loans are more inherently risky than fixed mortgage rate loans for the simple fact that the mortgage rate will eventually adjust. The most common type of adjustable rate loan is a 5/1 ARM, but there are also 1 year, 3 year, 7 year and 10 year ARMs.

With a 5/1 ARM, the mortgage rate stays the same for the first 5 years but can adjust after the initial period. There are usually annual caps and lifetime caps on how much the rate can adjust. A higher mortgage rate will increase your monthly mortgage payments. During the housing boom, many unsuspecting borrowers were steered into these types of loans and ended up losing their homes when the rate adjusted higher.

Adjustable rate mortgages are not all bad and they can be a useful tool for many homebuyers. Current short term adjustable mortgage rates are lower than long term rates. If you only plan to be in a home for a short period of time, you can have a lower monthly payment with a 5 year adjustable loan versus a 30 year loan.

Homeowners Take Advantage of Current Low Mortgage Rates

Historically, most people choose a 30 year term over a 15 year term but taking longer to payoff a mortgage loan will cost you a lot more in the long run, which we outline below. Mortgage rates today are just above record lows. Homeowners refinancing their mortgages are continuing to take advantage of this by lowering their payments and shortening their loan terms.

In the recent refinance report released by Freddie Mac, 37 percent of homeowners shorten their loan term when refinancing. 32 percent of homeowners who refinanced in the government's Home Affordable Refinance Program (HARP) took out a shorter-term loan. 40 percent of homeowners outside of HARP refinancing to a shorter term loan.

37 Percent Shortened Loan Term When Refinancing

15 Year Loans Better Than 30 Year Loans

Considering how low mortgage rates are, the trend towards a shorter term loan isn't a surprise but the biggest benefit to a 15 year loan over a 30 year loan is the amount of money you can save. Current 15 year rates are just about a full percentage point rate lower than 30 year rates.

A lower mortgage rate lowers the amount of mortgage interest you pay on the loan. Lowering the number of years to pay off the loan is the biggest savings. The one prohibitive factor for a 15 year loan versus a 30 year loan is that the monthly mortgage payments are higher for a 15 year loan. If you can afford the higher monthly payments, a 15 year term is the way to go.  Unfortunately, many people simply assume they can't afford a 15 year mortgage without looking into what their payments would actually be, much less weighing in the tremendous savings over the long term.

The following is an example of how much money can be saved in mortgage interest payments. Comparing a 15 year or a 10 year loan vs a 30 year loan. The longer the term, the lower the monthly payments are, so let's first look at the monthly payments for a $500,000 mortgage.

Monthly Mortgage Payment Difference

A mortgage for $500,000 financed for 30 years at 3.75 percent equals a monthly payment of $2,315.58.

$500,000 financed for 15 years at 2.875 percent equals a monthly payment of $3,422.93.

A loan for $500,000 financed for 10 years at 2.39 percent equals a monthly payment of $4,688.63.

The payment amount is higher for shorter term loans but if you can manage the payments its worth it. Take a look at the amount of mortgage interest paid over the life of the loan terms in this example.

Difference in Total Mortgage Interest Paid

$500,000 financed for 30 years at 3.75 percent will cost a total of $333,607.53 just in mortgage interest payments. When you include the principal paid the grand total comes to $833,607.53.

$500,000 financed for 15 years at 2.875 percent will cost a total of $116,127.15 in mortgage interest payments. When you include the principal paid the grand total comes to $616,127.15.

$500,000 financed for 10 years at 2.39 percent will cost a total of $2,623.07 in mortgage interest payments. When you include the principal paid the grand total comes to $562,623.07. Let's take a closer look at the total cost difference.

Shorter Term Mortgage Saves Hundreds of Thousands in Interest Payments

  • 30 year total cost $833,607.53

  • 15 year total cost $616,127.15

  • 10 year total cost $562,623.07

Going with a 15 year loan over a 30 year loan saves $217,000. Comparing a 30 year loan vs a 10 year loan saves $271,000. In this example you save a couple of hundreds of thousands of dollars in interest payments. You would be foolish not to take out a shorter term loan. Again that is if you can afford the monthly payments.

You should think real hard about a shorter term loan. Especially if the house you plan to buy is the last house you plan on ever owning.
Author: Brian McKay
October 8th, 2017
Posted in: Bank Mortgage Rates