15- vs. 30-Year Mortgage: Which is Better?

I’m going to attempt to answer the age-old question: 15 vs 30 year mortgage: which is better?

And I hate to break this to you, but it all depends (and I’m not even going to mention taxes here).

I want to start off with a table (it’s the accountant in me) outlining some basic assumptions when answering the 15 vs 30 year mortgage question for home buyers and owners. Hopefully this sheds a bit of light on these different mortgages right off the bat:

15-Year vs. 30-Year Fixed Mortgage

* Rates taken from BankRate.com on 1 July 2020.

Alright, if you only looked as far as the payment line, you might’ve received a bit of a jolt. The 15-year fixed rate mortgage requires a significantly higher monthly payment—to the tune of another $602 per month for the life of the home loan! Take a deep breath. You don’t pay anything else on the 15-year loan after 15 years (makes sense, eh?).

If you checked out the last two lines of the table you might have received a jolt in the other direction. If you do a 15-year mortgage you will save $90,054 of interest over the life of the loan versus the 30-year mortgage!

Clearly the 15-year mortgage is the best option in the long run, right? It depends.

Consider the Opportunity Cost

One thing you absolutely have to consider with the 15 vs 30-year term mortgage question: what is the opportunity cost?

Consider this: what if you did indeed take a 30-year mortgage, saving $602 in monthly cash flow, and invested that $602 each month for the life of your mortgage? If you invested it in a fund earning 6% (let’s not get into a debate about potential stock market returns at the moment), that investment would grow to $608,344!

So clearly your best option is to pass up the 15-year mortgage, stick with the 30, and invest the difference in savings, right? Not quite.

First off, you have to remember the extra interest cost of the 30-year mortgage (remember, I’m not including taxes in the analysis): $90,054. So you’ll need to reduce that investment amount from approximately $608k to a more appropriate $518,000 after accounting for the interest.

Well, still, another half-million dollars makes the 15-year an inferior choice, right? No, still not quite.

Looking for other ideas on paying off your mortgage quickly?

Consider a Different Angle

It’s not fair that you can invest the difference in savings for those 30 years without looking at the opportunity offered with the 15-year mortgage. If you take the 15-year mortgage, once you’ve paid off your house (in 15 years), you’ll have that entire payment available for investment.

So, in actuality, we need to compare the two side by side. Taking the 30-year loan allows you to save $602 for the life of the loan. If you take the 15-year mortgage, you’ll not save anything for the first 15 years, but then you’ll have $1,704 to invest for the last 15 years. What does that investment equate to? Again, using 6%, $1,704 invested monthly for the second 15 years results in a value of $499,737. Does that mean the 30-year mortgage is about $18,000 ($518,000-$499,737) better? Nope. You’ll need to take the cost of interest payments out of the 15-year mortgage value just as you did with the 30 year. With this analysis, the 30-year mortgage outpaces the 15-year mortgage by about $75,000.

Ah ha! Clearly the 30-year mortgage is the best choice for your finances. Um, maybe.

We have assumed a 6 percent return on your investment of that $602 monthly savings with a 30-year fixed rate mortgage. What happens if the actual return were only 4 percent? You would lose money compared with the 15-year mortgage.

Peace of Mind vs. The Numbers

But we really should slow down and take a look at the personal side of personal finance. We really should be talking a lot more about peace of mind and a lot less about the numbers.

What does peace of mind look like to you?

• Does it look like living completely and totally debt free?
• Or does it look like having more cash at your disposal to choose where it goes?

I value both, so here’s my recommendation: take the 30-year mortgage, but simulate the payment of the 15-year mortgage. You have to know yourself well enough to know you’re going to actually pay the extra $602 a month, because it really is easier said than done. But I like this route because it gives you more options with your cash.

You still go the route of aggressive debt pay-down (because I still love debt-free living and I think you will too), but the 30-year approach gives you a built-in emergency lever that lets you free up that cash if life throws you a curveball. And lately, life’s been throwing a lot of curve balls.

Follow the YNAB podcast on Spotify or Apple Podcasts to hear more personal finance wisdom from Jesse Mecham, the founder and CEO of YNAB. Curious to do your own loan calculations? Sign up for a free trial of YNAB (no credit card required!) to experiment with the impact extra payments can have by using our Loan Planner tool. And make a budget while you’re at it!