15 Year Mortgages Versus 30 Year Mortgages

The Difference Between 15-Year & 30-Year Mortgages

Over at the Outlier Model, owning and renting out property forms a big part of our master plan for early retirement. We started with our first property when we were 25 years old and we’re hoping to add another one soon!

When you buy property, you typically take out a mortgage with an amortization over a particular period of time. This is the lifetime of your loan – the amount of time it takes you to pay it back, including interest. Two common options are the 15 year mortgage and the 30 year mortgage. There are advantages and disadvantages to both approaches.

If you are able to afford the higher monthly mortgage payments, it might be prudent to consider a 15 year term. With the recent economic downturns, interest rates on 15-year mortgages have been close to historical lows. A 15-year mortgage presents several advantages to borrowers. With a shorter term and a lower rate, borrowers pay less interest over the lifetime of the loan and own their home sooner.

For example, consider a $300,000 mortgage with either a 30 year mortgage at 3.75% or a 15 year mortgage at 2.75%.

On the 30-year term, that works out to (approximately):

  • $1300 in monthly mortgage payments
  • $200,000+ in interest charges

On the 15-year term, it is:

  • $2000 in monthly mortgage payments
  • $100,000 in interest charges

Clearly, there are a lot of savings available to borrowers who can afford the monthly payments! If you intend on staying in your home for a long time, paying it off the mortgage as quickly as possible and with as little interest as possible is a great option. But for many people, myself included, the 15 year mortgage is just not realistic.

Instead, we opted to take a 30 year mortgage with our first property. Based on our purchase price and the interest rates at the time, we had ended up with a monthly payment that was less than what we paid in rent. Even though we would pay more in interest over time, there were several other advantages.

  • We were able to start building equity now, instead of 5 years from now
  • We were able to devote money to other investments, rather than throwing everything onto our property. Diversification is great!
  • Most importantly, we kept the monthly payments low enough that when we turned our condo into a rental property, we were not losing money.
  • And even with a 30 year mortgage, it’s important to note that you can still save yourself interest charges by making extra lump sum payments towards your principal or by increasing your monthly payment.

    Whether you end up choosing a 15 year mortgage or a 30 year mortgage depends entirely on your personal financial situation and your future plans. With our rental properties, we want to keep the mortgage payments low while maximizing our cash flow. That’s why we stuck with the 30 year term. But there are many benefits to the 15 year term as well. Perhaps when we buy our “forever home” we’ll feel differently.

    The Outlier Model is a personal finance and lifestyle blog based on the pillars of “living life a little bit differently”. Based on the belief that success follows those who choose to do something other than the normal, posts at The Outlier Model discuss topics such as budgeting, life hacking, and smart shopping. Using a combination of personal anecdotes, how-to tips and commentary, readers are introduced to the small steps that can help them become something more than average.

    Editor’s Note: Brian and CF do a great job of running The Outlier Model and I’ve been following their site for months now. So, jump over to their site and dig into some of their material!

{23 Comments}

  1. Shilpan says:

    I completely agree with you thoughts. With the 30 year option, you can invest money in other assets and make extra payments when you think it is appropriate. It also depends on how long you intend to stay in the house. If you are going to stay for less than 5 years or so, 15 years vs 30 years won’t save you much money.

    • CF says:

      That’s true! We are in a transition period right now. I don’t think we could commit to living anywhere longer than 3 or 4 years maximum at the moment.

  2. Pauline says:

    Savvy Scot my UK mortgage is 2.29% (lifetime tracker at base rate plus 1.79%, HSBC with 25% down). Which I why I also took a 30 years mortgage that I am not in a hurry to repay, my investments make more than 2.29% a year.

  3. Money Beagle says:

    The thing that most people get wrong when looking at this type of comparision is they see the $700 difference (between the $1,300 payment on the 30-year and the $2,000 payment on the 15-year) as an expense. That’s not true. It’s just an asset transfer from cash to your home. So, it really becomes a cash flow issue more than an expense issue. If you look at it and say ‘That’s costing me an extra $700 per month’ that’s completely false and I think more people would choose 15 year mortgages if they understood that.

    • CF says:

      It’s hard to want to lock in that $700 for 15 years though. I’d rather have the flexibility of putting that $700 where I need it most – maybe the home, but maybe also other investments.

  4. CF says:

    Rates are being kept low in the US and Canada right now, perhaps artificially low, to boost the economy. I’m sure it will rise again eventually. :(

  5. 30 years seems entirely too long to me to pay on anything!!! I personally think that if you can’t afford to get a 15 year mortgage, then you should wait to buy until you can. That is just my personal opinion.

    • CF says:

      It’d be a long time if I intended on staying there – for me, it’s more a way to keep payments low while someone else is building my equity for me. It’s very unlikely that we will keep any property for 30 years, especially a one bedroom condo in Vancouver! Once our equity is at a decent amount, we would most likely trade up to a rental unit in a better area with a smaller mortgage.

  6. Great post! We want out forever home paid off as soon as possible, so it’s on the 15 year term with 9 years left. Our rental, we wanted to cash flow as much as possible, and wanted a low payment so it wouldn’t be hard to cover if we had no renter for a period. Different mentalities for sure.

  7. We chose a 30 year mortgage but make the payments at the same rate as a 15 year mortgage. However, if anything comes up, we can easily scale back payments to save or pay for expenses.

    Right now, money is so cheap, so I’m not too worried about the interest expense, as the return on my investments far exceeds the amount of interest being charged.

  8. Jay says:

    Check out 20 year mortgages, they offer lower rates then 30′s not as good as 15′s, but you get the benefit of both a lower rate and shorter loan period without as large a payment as a 15 year winds up being. It is a happy compromise particurally if you want to take advantage of this low rate environment.

  9. A 15 year mortgage is a great option is the increased payments fit into your budget. You will save so much money in interest.

  10. My favorite part of a 30 year mortgage, only if you keep it for the full 30 years, is the fact that inflation makes your payments in the last few years much much cheaper than the payments in your first few years. Many people do not consider that.

    • CF says:

      I hadn’t thought of that either! I don’t think I’d keep any of my condos for 30 years though. I suspect the repairs as the buildings get older would not make it worth it for me. Perhaps if I ever bought a house, I would feel differently.

  11. When we refi-d, we went from a 30 year that we were making bi-weekly payments on down to a 15 year that we make just the normal payments – and we pay exactly the same on a yearly basis as we were paying. But we’ll save over $40K in interest. It’s worth running the numbers both ways, you may be surprised with the results.

    • CF says:

      That’s great! Sounds like it worked out for you. When we refinanced a few years ago, we kept the remainder of our term (30 years originally, with 28 years left and we refinanced with those 28 years). I actually wish we had refinanced to another 30 in order to lower our monthly payments – by this, this property was a rental and the extra cash flow would have been nice.

  12. Nice post. I think too often don’t consider a 15 year loan because it might mean too much money for them. But, if you’re able to swing it, it can be a huge cost savings over the life of the loan.

    • CF says:

      I think I would consider it on a home that I intended on living in for a long time, and even then, only if I had a large enough down payment to make the monthly payments reasonable. With our second condo, we opted for a 25 year term. The interest savings between 25 and 30 is still considerable!

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