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Why a 30-year mortgage beats a 15-year

You have the flexibility to pay off a 30-year mortgage in 15 years, if you want. Here's what it would cost you.

By MSN Money Partner Jun 29, 2012 10:21AM

This post comes from Len Penzo at partner blog Len Penzo dot Com.


Len Penzo dot Com on MSN MoneyWhen it comes to the great mortgage debate, I've already explained my position regarding 15- and 30-year loans: The 30-year loan is better for a multitude of reasons. In fact, I think it's a no-brainer.


Image: Real estate sign indicating sold house (© Ryan McVay/Digital Vision/Getty Images)When I bought my first home in 1990, interest rates were in double-digit territory. Today, 30-year loans make more sense than ever with mortgage interest rates continuing to set new all-time lows. In fact, last week, a person with excellent credit could get a 30-year loan for rates as low as 3.375% and 15-year loans for an incredible 2.75%.


So why is the 30-year mortgage a better choice? One of the biggest advantages is its flexibility. After all, holders of 30-year loans can always make the extra payments required to pay them off in 15 years, should they choose to do so.


However, the poor guy with a 15-year note who suddenly gets laid off or runs into other unexpected financial difficulties can't reduce his payments in order to stretch that 15-year mortgage into a 30-year loan. Sure, he could try to refinance, but that can be difficult -- especially for the unemployed.


Of course, the trade-off for having additional flexibility is higher interest payments. (Post continues below.)

Assuming a $200,000 loan, the impacts of those higher interest payments over time at today's rates can be seen in the following chart:


Len's mortgage chart

Obviously, folks with a 30-year mortgage are going to pay more interest, whether or not they make the extra payments required to retire their loan in roughly 15 years. Then again, how much more depends on how picky they are about getting the loan paid off in exactly 15 years.


In my example, a 30-year $200,000 mortgage at 3.375% results in a monthly payment of $884. Over 30 years, the homeowner would end up paying $118,309 in interest to the lender -- $74,000 more than a homeowner with a 15-year loan at 2.750%.


However, those who are truly serious about minimizing their interest costs by paying off that same 30-year loan in exactly 15 years could do so by increasing their monthly payments to $1,424 -- $540 more than the minimum payment.


Over the life of the loan, that strategy would result in interest expenditures of only $10,491 more than the 15-year mortgage. Spread out over 15 years, it's a premium of just $58 per month. Not bad at all for those looking for the added peace of mind.


Alternatively, faithfully making monthly payments over the life of the loan equal to that required by a 15-year mortgage at 2.75% ($1,357) would result in slightly higher additional interest costs of $14,330. That's a premium of $74 per month over the life of the loan, which would be a bit longer -- 15 years, 11 months.

So there you have it. Hopefully, this little example provides you with a bit more insight into just how much extra it currently costs to take on a 30-year loan over its 15-year cousin.


As you can see, no matter how you slice it, people who prefer the numerous advantages of a 30-year loan over a 15-year mortgage are always going to pay more interest. But for those who are looking for the extra flexibility of a 30-year loan as a hedge against a sudden loss of income, the added premium is a relative bargain.


More on Len Penzo dot Com and MSN Money:

Jul 5, 2012 6:32PM
The big question is whether you make the extra payments or other wise save the money if you do the 30-year mortgage.  My experience is people will NOT.  In 1993, when rates strongly fell and everyone was refinancing, I was scolded by my friends for doing a 15-year mortgage instead of the 30-year the experts called for.  My mortgage has been paid off for several years and my friends have 11 years left.  Think they saved the difference?  No, they "found" expenses to eat it up.
Jul 6, 2012 8:32AM
I'm sorry but I'm just blown away by this article. Advising people to needlessly throw money away on interest payments and potentially take even longer to pay off their homes than would be necessarily is crazy. I make about 100k a year and I'm living in a small apartment and saving up until I can afford to buy a house with something more like a 5 year repayment plan. When did it become natural for Americans to spend over half of their remaining life expectancy paying off one asset? We hear constant complaints about the lack of retirement saving in this country. Anyone stop to think maybe our problem is buying into the lie: to live the good life you have to sacrifice your future on an altar of interest payments? Compound interest is always working for you, or against you. Over 100k in interest payments alone!? Have some self control. Don't buy things you can't afford without 30 years of interest!
Jul 5, 2012 7:28PM
Yeah - I took the 15 year option, and then paid extra on top of that.  I paid it off in 11 and now I use what I would have been paying in mortgage payment to help my kids in college.  I think the better idea is to do 15 years and don't buy as much house as they say you can afford.  Buy a little less house and then you also have added flexibility.
Jul 6, 2012 11:23AM
Well, call me crazy, I did a 15 years morgage, and have 4 years left.  That sound better then 19 years left!!!!  Yes, you can find yourself with no job in 15 years, but the chances are more in 30!!!
Jul 5, 2012 9:30PM
There's some good info in the article, but it reaches too far.  Instead of "Why", the article should be entitled "When" a 30-year mortgage beats a 15-year.  The answer being that a 30-year beats a 15-year when:
1.  You have the discipline to make extra payments on your own
2.  You are worried about being able to make the payments on a 15-year if your life situation changes, but for some reason you do not have the same concern for the 30-year payment amount.
3.  You think "flexibility" in how much extra you pay on your mortgage is worth $58/month in extra interest.

A better article would have adjusted for inflation and opportunity cost of the extra payments in all the interest calculations.  I don't need an expert on MSN money to do some basic interest calculations, I'd like to see an in-depth analysis that takes all the factors into account.
Jul 6, 2012 12:58PM

I am amazed at the number of negative comments on this article.  There's one basic premise here, which is THE FUTURE IS UNPREDICTABLE.  There are a lot of people commenting like they know exactly how much money they will be making in the future (i.e. the 15 year is better), which is nonsense. Do you have guaranteed health, a guaranteed job, and a guaranteed salary for the next 15 years????  If not, then a 30 year with a lower payment is your safest bet.


I took on a 30 year loan, and paid it off in only 8 years.  I thought, at best, I would be able to do it in 15 years.  I had no idea my house would increase in value by over 80% in just a few years, and then come most of the way back down.  I had no idea the dow would drop by almost 50%, and then recover most of the way.  THE FUTURE IS UNPREDICABLE, plan for it by being conservative.

Jul 6, 2012 11:18AM

The writer is a moron, this is why Americans are so financially screwed. By listening to people like this!


 A 15 year note saves you over $10k in total interest over the life of the loan.  Buying a house you can't afford with a 15 or 30 year note is what got us in this situation in the first place!  If people bought what they can afford, and working your way up to a larger house in baby steps, while reinvesting any equity as a down payment each time, is the tried and true method of owning real estate. 


Our problem is we all want intant gratification!

Jul 6, 2012 6:16AM

well, the author may have the 'book learning,' but take it from an older makes more sense to pay off the house and get our from underneath the debt.  if you or your spouse lose a job, there is no fear of losing a place to live.  extra money monthly after house is paid for is awesome:)  and your net worth obviously increases because you OWN the house.  pay it off......

Jul 6, 2012 7:45AM
Took a 15-year mortgage and today house will be paid off in less than 6-years. Smartest move I made. Now I can sink the mortgage money into savings. Sweeeeet!!!
Jul 6, 2012 1:15PM

I'm paying a 15 yr mortgage as if it were an 8 yr loan. Does that make it twice as good as paying a 30 yr in 15?

Its simple math to me - pay off as quickly as you can while paying the least amount of interest < yrs < interest = best end result. Why does the author make this concept so hard?

Jul 6, 2012 8:26AM

Are you totally out of your mind?

You are obviously a Mortgage Slave Trader.


The best advice: be like me, NO MORTGAGE.

I saved money first, and then bought my house.

ZERO debt. but 100% discipline.

saved money for 12 years. My average family income is below 50K.

After 12 years (-being an immigrant arrived in the USA with NOTHING-)

we had 180,000. Bought a forclosure. The rest is history.


Freedom is GREAT!


But maybe one needs to be an immigrant for that.




Jul 6, 2012 11:19AM
What a crock of bull. The only one that benefits from taking a 30yr instaed of a 15yr loan is the Lender. You can save many thousands of dollars by going with a15yr instead of a 30yr. I refinanced my house from a 30yr to a 15yr loan my paymenst were only 120 more to pay off my house in half the time. I now have 6 years left to pay off my home and I will be 55 years old. I would not want to be 70, 80 or 90 when paying off my house. I have deceided to live meagerly for the 15yrs and live enjoying the rest of my life not worrying about a house payment. 
Jul 7, 2012 9:30AM

I'm replying to the person who cannot do simple math and referred to me as the moron.  Apparently myself and the the majority of people disagree with you! 


Like I said, if people lived and spent within their means, and quit living from hand to mouth, they would not be in a serious situation if something were to happen.  It's called a budget!  My wife and I worked very hard throughout our life, we practice what I preach.  I have zero debt, everything I own is paid for, house, cars, etc...0 credit card debt.  We did this by budgeting for a 1 income lifestyle even though both of us worked, this way if one of us lost our job, the bills got paid! 


I'm 54 years old, putting 1 child through college, and I will retire in 3 years, without a pension.  My wife has not worked for 8 years, our choice since the house was paid off.  We did this with High School educations, old fashioned American ambition, and simple financial common sense. 


BTW we got our money the old fashioned way, we earned it! 

Jul 6, 2012 7:42AM

Where do they get these people to write these things?   Basically this guys tells you right off the bat that getting a 30-year mortgage is a 'no brainer', then he spends the rest of the article telling you how to pretend it's really a 15-year mortgage, although it'll never really be as cost-effective as one.  My wife and I just refinanced for a 15-year mortgage, and it's one of the best decisions we've ever made.   Unless you are the most disciplined person ever, you'll never be able to pay an extra $500 a month each and every month for the life of your 30-year mortgage.  We knew this all too well, and also knew the only way we were going to be able to pay off our mortgage in 15 years was to, well, get a 15-year mortgage.  Duh.   We will ultimately save over $180,000 in interst over the life of the loan, and our monthly P&I payment is less than $180 more than our old 30-year mortgage monthly payment.   Now I think that's a no-brainer, don't you? 

Jul 5, 2012 8:37PM
What a piece of crap writing!  Suggesting someone get a 30 year mortgage and not really stress about how even if you paid it off in 15 years you will be paying more for the loan. It's this mentality that has gotten so many people in trouble.   As long as you live below your means and don't max yourself out, you can get a 15 year loan and pay THAT one off early, thereby saving even MORE!  Having a mortgage doesn't give you any benifits (that tax save more if you pay off your mortgage early and not getting the deduction)  Paying off early gives you more freedom!
Jul 6, 2012 7:21AM
That is without a doubt one of the dumbest articles I've ever read. Basically, get a 30 year mortgage in case your life goes to pot and you can pay it off early if you want. But you're missing the basic point of math people - a 15 year mortgage right now will save you MORE THAN 1% in interest and when you add that up, even in just 15 years, that is far too much money for anyone to just throw away.  I'm sure the banks are ALL for it - we all know how much the poor banks are suffering right now and eager for you to spend the next 30 years of your life paying for something you can't afford, when in reality you could assess your situation and pick something you CAN afford and well pay it off in 15.  All while they rack in BILLIONS of dollars every day while at the same time they get the money they're lending you from the Fed Res for pretty much FREE.    If you have such little faith in yourself that you have to get a 30 year mortgage because you're sure your own failure will preclude you from getting a 15 year mortgage, you probably have no business whatsoever even considering buying a home!  What a waste of time....
Jul 6, 2012 7:45AM
Ridiculous advice.  The whole reason we have so many people in financial problems is we borrow on credit cards, student loans, etc into perpetuity.  The same with the 30 year mortgage.  I don't know about the author but $11,000 is a lot of money to me over 15 years.  Let's look at putting that $58 a month in a growth mutual fund for our child's education or our own retirement.  The author should be ashamed of themselves by not analyzing and presenting the what that money returns at conservative 8% rate over 15 years.
Jul 6, 2012 12:14PM
The whole premise of the article of why a 30 year is better than a 15 year is stated as more flexibility.  But most people who choose a 15 year mortgage is not "the poor guy".  They usually have an 8 month emergency fund in bank deposits to give you that peace of mind of an unexpected layoff.  And people who understand interest and yield rates normally don't have credit card debt.  So the reason  why 30 is better than 15 is wrong.  The real reason to choose 15 is to save on interest and the deciding factor is if you can afford it.  Which by now people should have came to the realization that they can afford a mortage payment no greater than 25% of income and have an emergency fund as well. 
Jul 5, 2012 11:18PM

Sorry ... I did it all wrong I guess I had a 15 yr loan and paid it off in 13yrs.

Man I guess I really screwed up !!!!!!!!!

Jul 6, 2012 1:13PM

Besides the lower interest rate the another advantage of a 15 year mortgage is the phycology of it. I mean sure you may intend to pay your mortgage off in 15 years anyway, but will you really do it? I mean I know plenty of people who took advantage of rising house prices to actually refinance and take money out.  Some of those people are hurting now.  A 15 year loan (if you can afford it)  is just one more thing that forces you to make tougher decisions.  I’m not saying everyone should take a 15 year loan over a 30, but I don’t think it’s so cut and dry as the article would make you believe. Early on I focused on paying off my house and now am doing a lot better than most of my friends.  

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