15-Year vs 30-Year Mortgage: Payment and Interest Compared

What the loan term changes

The term is how long you have to repay the loan. The CFPB lists three things the choice affects:

• your monthly principal and interest payment;
• your interest rate;
• how much interest you pay over the life of the loan.

Source: CFPB, “Understand the different kinds of loans available”.

The CFPB gives two reasons a shorter term can save money: you borrow and pay interest for a shorter time, and the rate is usually lower, by as much as a full percentage point. How much you save depends on the loan amount and the rates you are actually offered. Rates vary among lenders, especially for shorter terms.

Worked example (arbitrary figures)

The figures below are an arbitrary example computed with the standard fixed-rate payment formula. They are not market rates or offers. They show principal and interest only, without taxes, insurance or mortgage insurance.

Loan amount: $300,000.

What the arithmetic shows:

• Same rate (A vs B). The 15-year payment is $732.92 more per month, but total interest is about $191,832 lower. That gap comes only from the shorter time.
• Lower rate (A vs C). Scenario C uses a rate one full point lower, the largest gap the CFPB mentions. The payment is $573.73 more per month and total interest about $220,486 lower.
• Equity. After 5 years, the 15-year borrower in scenario B owes about $51,136 less than in scenario A.

Change the loan amount or the rates and every number changes. Always run the numbers on your own Loan Estimates.

The case for a 30-year term

• Lower required payment. In the example, the 30-year payment is about 29% lower than the 15-year payment at the same rate ($1,798.65 vs $2,531.57).
• Lower debt-to-income ratio. A lower monthly payment means a lower debt-to-income ratio for the same income.
• Flexibility. Paying more than the required amount shortens a loan without committing you to a higher payment every month. Check whether the loan has a prepayment penalty: the CFPB lists it among the features to question before you sign.

The case for a 15-year term

• Lower total cost. The CFPB lists a lower total cost and typically lower rates for shorter terms.
• Faster equity. More of each payment goes to principal from the start, which matters if you plan to refinance or sell.
• Less interest paid. In the example, total interest falls by about $191,832 at the same rate. If you itemize, that also means less mortgage interest to deduct.

How to decide

1. Start with the payment you can carry comfortably with property taxes, insurance and savings goals. See mortgage preapproval.
2. Ask each lender for both terms on the same day, with the same points, so the comparison is fair. See mortgage rates explained.
3. Compare Loan Estimates, which the CFPB calls the official loan proposals, before deciding.
4. Consider other terms. The CFPB notes terms other than 15 and 30 years exist; ask lenders what they offer.