The choice between a 15-year and a 30-year fixed mortgage is a trade between a lower monthly payment and a much lower total cost. Here is the same $300,000 loan both ways. Rates are examples only (15-year loans are usually priced lower): 6.5% for 30 years and 5.875% for 15 years.
| 30-year at 6.5% | 15-year at 5.875% | |
|---|---|---|
| Monthly principal & interest | $1,896.20 | $2,511.36 |
| Total interest | $382,633 | $152,044 |
| Balance after 5 years | $280,833 | $227,491 |
| Balance after 10 years | $254,328 | $130,293 |
The 15-year loan costs $615.15 more a month but saves $230,589 in interest. Part of the saving comes from the shorter term alone (a 15-year loan at the same 6.5% would cost $170,398 of interest) and part from the lower rate.
Why the shorter loan saves so much
Interest is charged on the balance. A 15-year payment cuts the balance fast from the first month, so there is less balance to charge interest on every month after. On the 30-year loan, the first payment includes $1,625.00 of interest and $271.20 of principal; on the 15-year loan, $1,468.75 and $1,042.61. See how mortgage interest is calculated.
The middle path: a 30-year loan paid faster
Paying the 30-year loan with an extra $615.15 a month (the same total as the 15-year payment) pays it off in about 16.1 years with $184,165 of interest. That costs more than the true 15-year loan because of the higher rate, but the extra is optional: in a tight month you can pay only the required amount. Model it with the extra payment calculator.
Which one fits
- 15-year suits buyers with stable income, an emergency fund and retirement saving already on track, who want the home paid off sooner and the lowest total cost.
- 30-year suits buyers who need the lower required payment to qualify or to keep room in the budget, or who would rather invest the difference. A lower payment also makes a larger home affordable under the 28/36 rule, which is not always a good thing.
Compare with your own numbers by switching the term in the mortgage calculator, or print both schedules with the amortization schedule.