Which Is Better : 15-Year Fixed Rate Mortgage Or 30-Year Fixed Rate Mortgage?

15-year fixed rate or 30-year fixed rate?As a home buyer or refinancing household , you have choices with respect to your mortgage.

You can choose a loan with accompanying discount points in exchange for lower mortgage rates; you can choose adjustable-rate loans over fixed rate ones; and, you can choose loans with principal + interest repayment schedules or repayments which are interest only, as examples.

For borrowers using fixed rate loans, there’s also the choice between the 30-year and 15-year fixed rate mortgage. Each has its positives and negatives and neither is “better” than the other.

Choosing your most appropriate fixed-rate term is a matter of preference and, sometimes, of budget.

The 15-Year Mortgage
With a 15-year fixed rate mortgage, mortgage rates are often lower as compared to a comparable 30-year fixed rate mortgage. However, because loan repayment is compressed into half as many years, the monthly payment will necessarily be higher, all things equal. On the other side, though, homeowners using a 15-year fixed rate mortgage will build equity faster, and will pay less mortgage interest over time.

The 30-Year Mortgage
With a 30-year fixed rate mortgage, mortgage rates tend to be higher as compared to a 15-year fixed rate loan, but payments are much lower — sometimes by as much as 50%. Lower payments come at a cost, however, as mortgage interest costs add up over 30 years. Regardless, 30-year fixed rate mortgages remain the most common mortgage product for their simplicity and low relative payment.

Which One Is Right For You?
There is no “best” choice between the 15-year fixed rate mortgage and the 30-year fixed rate mortgage. Choose a product based on your short- and long-term financial goals, and your personal feelings regarding debt. Mortgage applicants choosing the 30-year fixed rate mortgage can qualify to purchase homes at higher price points, but those using the 15-year fixed rate product will stop making payments a decade-and-a-half sooner.

There are benefits with both product types so, if you’re unsure of which path works best for you, speak with your loan officer for guidance and advice.

Reduce Long-Term Loan Costs With A 15-Year Fixed Rate Mortgage

Comparing 30-year fixed rate mortgage to 15-year fixed rate mortgages

For as low as 30-year fixed rate mortgage rates are today, 15-year fixed rate mortgage rates are even lower.

According to Freddie Mac’s weekly mortgage rate survey, the average 15-year fixed rate mortgage rate is now 3.27% nationwide with an accompanying 0.8 discount points. 1 discount point is a closing cost equal to 1 percent of your loan size.

The current 15-year fixed rate reading is just one tick above the all-time, 15-year fixed rate mortgage low of 3.26% set in October 2011.

If you’ve ever thought of “going 15″, it’s a terrific time to talk to your lender.

The primary benefit of using a 15-year fixed rate mortgage as opposed to a 30-year fixed rate one is that a 15-year fixed rate mortgage dramatically cuts the long-term interest costs of your loan. The downside is that monthly payments are relatively large.

At today’s mortgage rates, per $100,000 borrowed :

  • 15-year fixed rate mortgage : $704 principal + interest monthly
  • 30-year fixed rate mortgage : $477 principal + interest monthly

So, for homeowners opting for a 15-year fixed rate mortgage, the monthly principal + interest payments will be 48% higher as compared to a 30-year fixed rate mortgage of the same loan size. Long-term, however, because the 15-year fixed rate mortgage interest rate is lower and because it pays off in half the time of a 30-year loan, a homeowner will save $45,000 in interest costs per $100,000 borrowed.

$45,000 per $100,000 borrowed is a huge amount of savings. It’s monies that can be used for college tuition, home improvement projects, retirement savings, or anything else. 

That said, the 15-year fixed rate mortgage is not ideal for everyone.

Because it requires higher monthly payments, a 15-year fixed rate mortgage may add stress to your household budget. Furthermore, once you commit to a 15-year loan term with your lender, you can’t revert back to a 30-year loan term without a refinance and refinances can be costly.

Therefore, be sure of yourself when selecting a 15-year fixed rate loan. The rewards are great, but the risks can be, too.