15-Year vs 30-Year Mortgage Decision

By Eric Tyson, Robert S. Griswold

What are the advantages of a 15-year versus a 30-year mortgage? After you decide which type of mortgage — fixed or adjustable — you desire, you have one more major choice to make. Do you prefer a 15-year or a 30-year loan term? (You may run across some odd-length mortgages — such as 20- and 40-year mortgages; however, the issues remain the same as when comparing 15-year to 30-year mortgages.)

If you’re stretching to buy the home of your dreams, you may not have a choice. The only loan you may qualify for is a 30-year mortgage. That isn’t necessarily bad and, in fact, has advantages.

The main advantage that a 30-year mortgage has over a comparable 15-year loan is that it has lower monthly payments that free up more of your monthly income for different purposes, such as saving for other important financial goals like retirement. You may want to have more money each month so you aren’t a financial prisoner in your abode.

A 30-year mortgage has lower monthly payments because you have a longer time period to repay it (which translates into more payments). A fixed-rate, 30-year mortgage with an interest rate of 7 percent, for example, has payments that are approximately 25 percent lower than those on a comparable 15-year mortgage.

What if you can afford the higher payments that a 15-year mortgage requires? Should you take it? Not necessarily. What if, instead of making large payments on the 15-year mortgage, you make smaller payments on a 30-year mortgage and put that extra money to productive use?

If you do make productive use of that extra money, then the 30-year mortgage may be for you. A terrific potential use for that extra dough is to contribute it to a tax-deductible retirement account. Contributions that you add to employer-based 401(k) and 403(b) plans (and self-employed SEP-IRAs) not only give you an immediate reduction in taxes but also enable your money to compound, tax-deferred, over the years ahead.

Another vehicle for tax-deductible contributions is the Health Savings Account (HSA) for those with higher deductible health plans. Everyone with employment income may also contribute to an Individual Retirement Account (IRA). Your IRA contributions may not be immediately tax deductible if your (or your spouse’s) employer offers a retirement account or pension plan, but they will grow tax-free.

If you’ve exhausted your options for contributing to retirement accounts and an HSA, and if you find it challenging to save money anyway, the 15-year mortgage may offer you a good forced-savings program. If you elect to take a 30-year mortgage, you retain the flexibility to pay it off faster if you so choose. (Just be sure to avoid those mortgages that have a prepayment penalty.) Constraining yourself with the 15-year mortgage’s higher monthly payments does carry a risk. If you stumble during tough financial times, you may not be able to meet the required mortgage payments.