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15-year vs. 30-year mortgage: How to decide which is better

Yahoo Personal Finance· Getty Images
5 min read

When you apply for a mortgage, whether to buy a home or refinance your existing loan, you'll need to decide the mortgage term that you want. In this context, "term" refers to the repayment period. This period is a length of time, in years, during which you'll make monthly payments toward your mortgage principal and interest.

Your mortgage term is important because it affects:

  • The interest rate you'll be offered

  • How much you'll pay for principal repayment and interest charges each month

  • How much total interest you'll pay over the lifetime of your mortgage

Read more: How much house can I afford?

Most fixed-rate mortgages have a term of 15 or 30 years.

A shorter term generally means you'll get a lower rate, pay less in interest over the life of your loan, and build equity faster. However, your monthly payment will be higher.

A longer term generally means your payment will be lower, but you'll get a higher rate and pay more in interest over the years. The longer term and lower monthly payment could help you qualify for a bigger loan. This strategy may be appropriate if you're shopping for a home in a higher-cost housing market, but only if you feel confident that you can afford the payment for that larger amount.

Dig deeper: 5 strategies to get the lowest mortgage rate

To get a sense of the cost differential for these two loan products, let’s run some numbers.

If you get a mortgage for $400,000 at 7.25% for 30 years, your monthly principal and interest payment would be $2,728.71, and your total interest costs would be $582,333.84.

For the same $400,000 loan, but this time at 7% for 15 years, the monthly payment would be $3,595.31, and your total interest paid would be $247,156.36. This means your monthly payment increases by $866.60, but you save over $335,000 in total interest costs.

Tip: If you refinance an existing 30-year mortgage after you’ve made payments for a number of years, you may want to consider a shorter term rather than restart your repayment period with a new 30-year loan. Depending on how much equity you’ve built up, your payment could be about the same or even lower.

Learn more: Compare today's 30-year mortgage rates

Adjustable-rate mortgages (ARMs) typically have a 30-year term, but that’s where the similarity with a 30-year fixed-rate mortgage ends. The ARM starts with a fixed rate for a set number of years, but then it switches to an adjustable rate for the remainder of the term.

The fixed-rate period commonly lasts three, five, seven, or 10 years, after which the adjustable period continues for the remaining years. Your rate could go up or down depending on a number of factors, including economic conditions. Most ARMs that are in the adjustment period adjust annually, while some adjust more or less frequently. When your ARM adjusts, your rate, payment, and total interest expense could be lower or higher.

Some borrowers choose an ARM because the initial fixed rate is attractive, and they assume they'll be able to refinance into another loan with a comparable or lower rate before the ARM's fixed-rate period ends and the rate adjusts. Sometimes, this strategy pays off. Other times, the borrower is unable to refinance, or interest rates have moved higher, and the anticipated lower rate is no longer an option. In that case, the borrower must continue to make the higher payment or try to sell the home.

Dig deeper: Adjustable-rate vs. fixed-rate mortgage

Not a standard option

A 40-year term isn't a standard option to buy a home or refinance an existing loan. If you do find a 40-year term for either of these purposes, your monthly payment may be lower, but building equity or paying off your loan will take a long time. Due to the longer term, you'll pay much more interest over the term of the loan. You may also be charged a higher rate for a 40-year mortgage.

A loan modification option

A 40-year term may be more appropriate for a homeowner who's struggling to pay off an existing loan due to financial hardship. In this case, the mortgage lender may offer to modify the loan and extend the term as an accommodation to avoid a foreclosure that neither the lender nor the borrower wants. With a 40-year term and lower payment, the homeowner may be able to keep the home.

Getting a mortgage with a 15-, 30-, or even 40-year term doesn't mean you must take that many years to repay your loan. You can choose to make an extra mortgage payment every year or from time to time, such as when you receive a gift, bonus, or income tax refund. Paying more if and when you can help you build equity faster, stop paying for private mortgage insurance sooner, pay less total interest expenses, or pay off your loan quicker. While you can't lengthen your loan term without your lender's approval, shortening your term may be somewhat up to you.