The 15-year vs. 30-year mortgage debate

A 15-year mortgage allows you to pay off your mortgage twice as fast while saving a significant chunk of money on interest. Now let's examine some other issues.

By MSN Money Partner Mar 25, 2011 9:43AM

This guest post comes from Len Penzo at Len Penzo dot Com.


According to Freddie Mac's survey last week, there was a spread of 0.79 of a percentage point between the 15- and 30-year fixed-rate mortgage benchmarks, which just so happened to be the largest spread since Freddie started tracking the 15-year mortgage 20 years ago. For comparison purposes, the average spread over that same time period has been only 0.47.

I think most people naturally assume that, when it comes to choosing between a 15- or 30-year fixed-rate mortgage, the 15-year loan is usually the better option anyway. Throw in this historic spread, and I'm sure a lot of folks out there are now beginning to think they'd be absolutely crazy to take out a 30-year loan. Post continues after video.

On the surface, it makes sense. All things being equal, a 15-year mortgage allows you to pay off your mortgage twice as fast while saving a significant chunk of money on interest.

That being said, I still think the 30-year mortgage is a more logical choice for most people because it has so many more advantages over its shorter-termed cousin.


Here are several big reasons why I think a 30-year fixed-rate mortgage is the more pragmatic choice:

  • Lower payments. Of course, the biggest advantage of the 30-year mortgage is that it comes with lower payments, and the difference can be used to invest or save as you see fit. In fact, it doesn't take a rocket scientist to know that 30-year mortgages are much ...
  • More budget friendly. Those lower payments not only take the strain off tight budgets but, if need be, they also allow you to stretch your dollar enough to purchase a more expensive home.
  • Increased flexibility. Two years ago, with my employer in a bit of trouble and potential layoffs looming, I refinanced from a 15-year to a 30-year mortgage in order to lower my monthly payments by more than 40%. Today, with the layoffs still going on, you can bet I sleep a lot better knowing that my mortgage payment is only $600 per month instead of $1,000.
  • More control. With a 30-year mortgage you are almost always free to make additional principal payments necessary to pay off your loan in 15 years without penalty. However, you are never obligated to do so, and can always change your mind as life's circumstances dictate. With the 15-year loan, you are hopelessly committed to giving that extra money to your lender each month -- whether you can really afford to at the time or not. This leads to another big advantage of 30-year loans.
  • Reduced financial vulnerability. By committing to give your lender that additional principal each month, you could be needlessly tying up too much of your money in your house. While it's true that the shorter loan builds home equity faster, you still need a lender's permission to tap into it with a home equity loan. If I lost my job tomorrow, it is highly unlikely my bank would agree to give me such a loan, making that equity useless to me in time of need.
  • More opportunity for financial balance. Yes, building home equity and getting that house paid off is a noble goal. However, for young people just starting out, there are often other very important financial obligations that need to be addressed too. The higher payments that come with a 15-year mortgage make little sense if that leaves you unable to build an emergency savings account, or contribute anything to your 401k plan, IRA, and perhaps your kids' college funds.
  • Bigger tax deductions. I can hear all those keyboards banging out the nasty emails to me right now. Len, you dummy, agreeing to pay more interest in exchange for a bigger tax deduction is like spending a dollar to save a dime.I get it. This should never be the only reason for taking a 30-year mortgage over a 15-year mortgage. However, all things being equal, the larger tax deduction for the 30-year loan does temper the interest savings of a 15-year loan -- if only a little bit.
  • Effective inflation hedge.Inflation erodes the value of the dollar over time. As a result, payments made during the last 15 years of a 30-year loan are significantly lower in real terms than the day you first got the loan. That's why banks hate sustained periods of high inflation: Folks with longer-term fixed-rate loans end up repaying those loans with dollars that are worth far less than the value of the dollars they originally borrowed.

No matter how you look at it, the faster inflation rises, the less sense it makes to pay off the mortgage early. With that in mind, a 30-year loan is definitely your best opportunity to stick it to the bank. For many people, I suspect that's probably reason enough to choose one.


More from Len Penzo dot Com and MSN Money:


Mar 25, 2011 5:35PM
Six of the eight arguments are basically the same: "your payment will be lower." Number seven (tax deduction) is already debunked, but the author lampsahdes it so I won't dwell on that one. So there is one decent point in here: If you have a 30 year loan, your interest rate might be below inflation. I'll also give half a point for the sixth bullet, which at least puts a spin on the lower-payment drum the author is pounding - as long as you actually use the extra money to fund those other financial priorities.
Mar 26, 2011 2:31PM
The main thing the author doesn't mention is probably the most important. Smart buyers already know that they can get a 30 yr fixed mortgage with lower payments and run an amortazation schedule and pay ahead on just the principle payments and pay your mortgage off sooner plus at your own pace and still save thousands of dollars in interest payments. Smile
Mar 27, 2011 1:46AM
A $150,000 loan @ 4.8 % @ 30 years = $787 per month = $283,320 total

A $150,000 loan @ 4.1 % @ 15 years = $1117 per month = $201, 060 total

Stick it to the bank you say on a 30 year loan................uh........................ok

The 15 is so much better especially if you work hard and make extra payments. We started with a 30 loan, refi'd with a 15 year, and were able to payoff just shy of 11 years.

Needless to say we saved a mountain of cash and will reap a nice reward when we sell off in about 10 years or become slumlords.

The interest write off is a pebble in a pond that is highly exaggerated and your lovely congress is trying to kill it off completely.

Your goal should always be to never give a banker a penny more in interest than you need to.

Work to pay off your big ticket items, cars and house and you will save large and not have to work so hard for no good reason...............paying a banker is no good reason.

Mar 26, 2011 11:41PM
15 year fixed, with a payment no more than 25% of your take home pay. Don't be house poor and don't buy something you can't afford. "Dave Ramsey"
Mar 27, 2011 12:40AM
Something like 95% of people do not pay extra on their mortgage so the good intentions of getting the 30 but paying like 15 are completely unrealistic.  At the end of the day most people only have lots of extra fast food meals to show for the hundreds of extra dollars they have in their budget because they got the 30. 

Additionally, the average time in a house is 7 years.  So with a 30 year note you will really struggle to ever pay off a mortgage as after 7 years only 12% has been payed off compared to 37% with a 15 yr note (thats calculating 5% loan for both).  You are almost completely dependent on price appreciation and then discipline on the next purchase in order to get ahead; the first has historically not been a big problem but is completely out of any one persons control while the latter is very controllable and yet is sadly lacking in many Americans. 
Mar 27, 2011 1:20PM
I took a 30 and have paid extra to principal in every payment I've ever made but I don't HAVE TO.  I like the flexibility but I'll do the disciplined thing and get it paid off early, probably within 15 years.  Win, Win.
Mar 27, 2011 10:50AM
I took a 15 year loan out with in 2003 for 44,000 with big name bank. I paid off the loan in 2009. I always paid extra principal every month. One day in the mail i got a past due notice from the bank, they had entered my monthly payment in error, so my account went to past due. it took me over a week of serious calling to customer service for anyone even to talk to me. finally some lady agreed to look over my loan and the history of my payments and called me back and said it was an error on there part. I will bank with my local small town bank before i ever take out a loan with the "big box banks" again. I would rather pay a little more interest knowing i can actually talk to someone. The big banks are not all good! They need help in customer service relations. I paid that loan off as fast as i could.
Mar 26, 2011 11:26PM
Dangrs1. It's because of people like you that the country is in the mess it's in right now. Planning to pass off your debts to someone else. Such integrity. But, besides this moron, if you can afford it, take the 15 year note. You'll own your house outright and be able to actually look forward to a retirement debt-free. Taking the 30 year and making extra payments to take it under 20 is great too, but you have to be disciplined to do it. I have a 10 year, and my house will be payed off by the time I'm 54. Debt free at last!

Mar 27, 2011 11:39AM
We took a 280,000 mortgage for 15 years back in 2004 when we renovated our three bedroom ranch (1200 sq ft) and turned it into a 3600 sq ft farmhouse complete with attached in-law apartment.  I was 48 and husband 51.  We live in Connecticut where everything is so expensive, so our plan is to retire in six to eight years when our house is paid off and move to another state more south of here with lower taxes.   I will admit the budget is tight with the higher payments, but we look forward to being debt free upon retirement.  Our house is now valued at 400,000 and we currently owe 199,000.  We also have 401Ks.  Had we taken a 30 year mortgage, we probably would not have used the extra money wisely.
Mar 26, 2011 9:53PM
I am 53 years old and just started a 30 year loan. At my age why take a 15 and rush to pay it off. Odds are I'll die before I pay the 30 off so at that point my wife or who ever is left sells the house. Her new boyfriend won't want the place anyway. 
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