15 Year vs 30 Year Mortgage - Which is Better?

Compare Interest Rates

Right now, 15 year mortgages are averaging a 2.5% interest rate and 30 year mortgages are averaging 3%. If you buy a $300,000 home, you will pay a total of $455,400 over the course of a 30 year loan ($155,400 in interest). That same $300,000 home would cost a total of $360,00 over the course of a 15 year loan ($60,000 in interest) saving you $95,400 in interest. Saving on interest is the main argument to do a 15 year loan.

Lower Monthly Payment

The counter argument to that is a 30 year loan will give you a more affordable monthly payment. For the same example as above, a $300,000 home the principal and interest total is:

But the question is why do you need to pay less? Because what usually ends up happening is you take the lower monthly payment to buy a more expensive house. It’s common to hear “I couldn’t afford to do a 15 year loan and live in xyz, so that’s why we did the 30 year”. But the problem with that logic is you are telling your convincing yourself a 30 year mortgage is cheaper. When in reality the 30 year mortgage is $100k more expensive and now you just bought a house that has a market value of probably $50k more than what you would have bought with a 15 year mortgage. All in all it ends up being a $150k swing more expensive doing a 30 year mortgage. In reality people that do 15 year mortgages should be the ones buying bigger and nicer houses because they’re paying a lot less for the house. But in today’s society, at least for the middle class, it’s the other way around. To build wealth you cannot think short term, month to month, you have to think long term. Check out this article here on understanding the power of compound interest and using it to your advantage.

Investing the Difference of a 30 Year Mortgage

A common argument for the 30 year mortgage is the ability to invest the difference of the lower payment. If you invested the $735 every month from year 1 to year 30 you would finish with $1,661,457. Whereas if you paid off a 15 year mortgage and then invested the entire payment of $2,000 every month after, from year 16 to year 30, you would finish with only $828,940. Therefore, the 30 year mortgage would make you $737,117 more ($832,517 in investments - $95,400 extra paid in interest).

Human Emotion & Behavior

On paper this argument makes a lot of sense, and this makes the 30 year mortgage very appealing to me because I love seeing numbers like this come together to our advantage. However, the issue lies with discipline and human emotion. Human emotion being- the freedom you feel when you don’t have a mortgage payment. Ask anyone who just paid off their mortgage and ask them how it feels. Taking on $100k’s worth of debt will weigh heavily on you. Carrying that weight and stress on top of forcing the responsibility on yourself to always be employed with a good income to pay the bills will take a toll on you over 30 years. Bad things will happen to you at least once over a 30 year period. Being on a 15 year mortgage cuts the risk in half.

Discipline

The other factor to consider is discipline. A lot of people say this argument about investing the difference of the lower payment, but I have yet to meet someone who has truthfully invested every single extra dollar from year 1 to year 30. I’m not talking about just investing $735/month in general, I’m talking about investing $735 on top of the amount you already contribute towards retirement. I have yet to see it. Also, if this was the case then why don’t you borrow on everything you possibly could. Like your refrigerator, furniture, cars, phones, etc and continually refinance every debt you have to keep the payments as low as possible for as long as possible. That way you can invest the difference every month in order to make more profit. No one does that though because that introduces more risk. An easy way to eliminate risk is to pay your mortgage off ASAP.

I hear a lot, especially from real estate agents- start with a 30 year mortgage and if you want to pay more you can always pay it off like a 15 year. The problem is again, I have never met anyone that has done this for 15 straight years. There is always an excuse of something that “comes up” that ends up eating away at the extra money. By taking a 15 year mortgage your forcing yourself to be disciplined. And if you really are going to pay a 30 year mortgage off in 15 years then you’d be dumb to take out a 30 year mortgage because you just got the same thing but paid a higher interest rate. “But what about emergencies where I need more cash flow?” A house payment shouldn’t be collateral for emergency situations. You should have an emergency fund for emergency situations. An emergency fund is at least 6 months of expenses saved up in a bank account or a place that is easily accessible and only used in emergencies. 

What If It’s Not Your Forever Home?

Another argument I hear a lot is what if I’m moving out of my house in a couple years? “It’s not my forever home”. Average stay in a home is 13 years, if you live in a city the average is only 8 years, and if you’re under the age of 37 the average is 6 years or less. The point being no matter what house you live in, you’re never going to live there forever. Let’s look at an example of where you move 3 times in 15 years, or every 5 years. Every move you buy a house that’s equal in price and you roll over whatever equity you have in your current house as a down payment to your next house and keep paying the same monthly payment. For the first house you pay $300,000. If you stick with a 30 year mortgage, after you sell your third house (after year 15) you will have accumulated $126,665 in equity. If you do a 15 year mortgage at the end of year 15 you would have accumulated $300,000 in equity. Therefore, by doing a 15 year mortgage, even though you’re moving a lot you still are building up equity more than twice as fast! The power of having more equity when you move is you can either pay for the next house in cash or you can buy a bigger house because you have a lot bigger down payment.

Conclusion

Shark Tanks’ Kevin O’ Leary suggests being out of all debt to include; car debt, student loan, and mortgage debt by age 45. One study done by Chris Hogan (*Check out Chris Hogan’s book about this study Here) reported that out of 10,000 millionaires studied it takes the average millionaire 10.2 years to pay off their home. Guys we are here to learn to be wealthy not learn to stay lower or middle class. And the best way to become wealthy is to learn from wealthy people. For those reasons, I took out a 15 year mortgage on my house with a goal to pay it off in 10 years or less. The forced discipline to pay off my house ASAP, the stress relief I will feel the sooner I pay it off, and the interest saved is well worth it for me.