Is a 15-year or 30-year mortgage better?

The full picture

Every comparison of these two loans quotes an interest saving and stops there. The saving is real, and it is not the deciding factor.

Two things the table cannot show you. The first is that a 30-year loan can be paid like a 15-year one — nothing stops you sending the extra $798 every month and shortening the term yourself — but a 15-year loan can never be paid like a 30-year one. The higher payment is contractual. If your income drops, the 30-year borrower reduces to the required payment and the 15-year borrower does not have that option.

The second is what the money would otherwise do. Paying down a 6.76 percent mortgage is a guaranteed 6.76 percent return, which is genuinely good. But the extra $798 a month is money not going into a retirement account with an employer match, and a match is an immediate return no mortgage rate beats. If you are not capturing a full match, that comes first.

Rates move weekly and are published every Thursday, so treat any figure — including these — as dated. Yours will also differ from the average by credit score, down payment and the day you lock.

What the rate gap actually buys

Freddie Mac publishes the Primary Mortgage Market Survey each Thursday, and the 15-year average sits below the 30-year average. That gap, not the shorter term by itself, produces most of the interest saving; run the comparison against the week's published averages and your own quoted rate rather than a remembered figure.

Two things people expect the mortgage to do for them usually do not happen. The first is the interest deduction. It is available only if you itemize rather than take the standard deduction (IRS Topic 501), and it is limited to interest on up to $750,000 of home acquisition debt for loans taken after 15 December 2017, or $375,000 if married filing separately (IRS Publication 936). For a household that takes the standard deduction it changes nothing at all, so it should not be counted as an offset against the higher interest of a longer term.

The second is flexibility. Paying ahead on a 30-year loan does not lower next month's required payment; the servicer still expects the scheduled amount unless the loan is recast, and recasting is at the servicer's discretion and not offered on every loan. Not all mortgages permit prepayment without cost either, so read the loan estimate before you build a plan on it (CFPB on prepayment penalties).

Common questions

Is a 15-year or 30-year mortgage better?

Neither term is better in the abstract; they answer different questions. A 15-year loan is priced at a lower rate and costs far less interest over its life, but the payment it requires is much larger and that obligation is fixed for the whole term. A 30-year loan costs more interest and leaves the difference in your hands each month. The decision is not which lifetime total is smaller. It is whether the larger payment would still be affordable in a year when your income drops, because the lender will expect it either way.

Can I get the 15-year result from a 30-year loan?

Most of it. Paying extra principal on a 30-year loan shortens the term and cuts total interest, and the schedule stays yours to set rather than the lender's. What prepaying cannot recover is the lower rate the 15-year term is priced at, so the outcome is close but not identical. Check the loan estimate for a prepayment penalty before counting on this, because not every mortgage allows extra principal without cost.

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