Shopping for a mortgage isn’t just about getting the lowest interest rate. Another important factor you must consider is whether you’ll use a 15- versus 30-year mortgage. The loan term affects not only the amount of time it takes to repay the mortgage but also the interest rate you receive and how much total interest you’ll pay over the life of the loan.

Let’s compare these two mortgages and their features to help you decide which type of mortgage is right for you.

What Are 15-Year And 30-Year Mortgages?

A mortgage is used to buy a home or to borrow money against its value. The agreement between the borrower and lender includes specific terms for when the borrower must repay the loan. The two most common mortgage loan terms are 15-year and 30-year mortgages. The interest rate is typically lower on a 15-year mortgage, and because the term is half as long, you pay much less interest. However, that also means you’ll have higher monthly mortgage payments compared to the 30-year mortgage. The Federal Housing Administration (FHA), Department of Veterans Affairs (VA), U.S. Department of Agriculture (USDA) and conventional loans all offer these loan types to qualifying borrowers.

15-Year Mortgage: The Details

A 15-year mortgage spreads the loan payments over 15 years with a fixed interest rate. Because this is a shorter loan term, borrowers usually have higher monthly payments. However, lenders typically offer lower interest rates on these loans, depending on your creditworthiness. Some borrowers opt for this loan type versus a 30-year mortgage as it can save them a lot of interest.

30-Year Mortgage: The Details

A 30-year mortgage is one where your payments are spread out over 30 years, twice as long as the 15-year mortgage. This is by far the most common type of home loan in the U.S. and offers lower monthly payments. 30-year mortgages are generally more affordable for homeowners, but they also have higher interest rates and the principal balance does not decline as quickly as the 15-year home loan. As a result, you pay much more interest over the life of the loan. The higher the interest rate of a 30-year mortgage versus a 15-year, the wider the interest gap between the two types of loans.

Comparing And Contrasting 15-Year And 30-Year Mortgages

A borrower’s loan terms affect the length, monthly payments and interest associated with the mortgage. A shorter loan term, like the 15-year mortgage, typically means higher monthly payments but less interest paid over the life of the loan. A longer term loan, like a 30-year mortgage, usually has lower monthly payments but with a higher interest rate.

For example, let’s say you take out a $300,000 loan with a 7% fixed interest rate. If you choose a 15-year mortgage, you’ll pay $2,696 per month (principal and interest), and $185,367 in interest after 15 years.

If you choose a 30-year loan, you’ll only pay about $1,996 per month, but when you finally pay off the loan, you’ll have paid $418,527 in interest.

The difference in total interest paid in this example is $233,160.

How To Choose Between A 15-Year Vs. 30-Year Mortgage

There are many factors to consider when deciding on the type of mortgage you want. The 15-year mortgage allows you to pay off your mortgage much more quickly while paying significantly less in interest. However, your monthly payment will be higher than the 30-year mortgage, and the lender may have a higher income requirement to qualify for this loan.

Each type of mortgage has its advantages and disadvantages, and the lender’s eligibility criteria can affect your mortgage interest rate.

Eligibility Requirements

Below are eligibility factors that may influence interest rates on mortgage loans.

• Financial status: Lenders look at your financial stability to assess your level of affordability. If you have higher income and assets, you may qualify for a lower mortgage rate and higher loan amount.
• Credit score: Generally, borrowers with higher credit scores receive higher interest rates than those with lower credit scores. The lower your credit score, the riskier you appear to the lender.
• Debt-to-income ratio: Your DTI ratio is the sum of your monthly debts divided by your gross monthly income. The higher your DTI, the less mortgage amount you can comfortably afford. Most conventional loans allow for a maximum DTI of 45%.
• Down payment: Making a larger down payment could help lower your interest rate. When you have more of a stake in the property, a lender will be able to offer you a slightly lower rate.
• Loan-to-value ratio: Your LTV ratio compares the loan amount to the property value. If you make a larger down payment and reduce the LTV, you could receive a lower rate.
• Property type: Rates are typically lower when purchasing a primary residence compared to a secondary home or investment property.

Pros And Cons Of 15-Year And 30-Year Mortgage Loans

15-year mortgages and 30-year mortgages both have their advantages and disadvantages. Here are the pros and cons of each loan type to help you determine which option is right for you.

Pros And Cons Of A 15-Year Mortgage

15-year home loans have some serious advantages, but they also have some downsides that make them a poor option for some borrowers.

Pros

• You’ll build home equity and pay off your home more quickly.
• You’ll be eligible for a lower interest rate.
• You’ll pay much less interest over the life of the loan.

Cons

• You’ll pay a higher monthly payment.
• You may not be able to afford that expensive of a home.
• You’ll have less liquidity, since more of your net worth will be in your home more quickly.

The Bottom Line

15-year mortgage and 30-year mortgage are two of the most common home loan terms. Whether you choose a 15-year versus a 30-year mortgage depends on your financial situation and the flexibility you want in your household budget. Before making a decision, weigh the pros and cons and consider what you can handle financially.

Are you ready to start shopping? Check out your mortgage options today by starting an application with Rocket Mortgage^®.