30-Year Fixed-Rate Mortgages vs. 15-Year Fixed-Rate Mortgages

The 30-year fixed-rate mortgage has been the most popular option for home loans since Franklin D Roosevelt initiated the New Deal in 1933. The home loan option offered stability over the balloon mortgages that banks preferred to use because banks could no longer call in the note prior to the end of mortgage's terms. Despite its benefits, bankers may be transitioning to a 15-year fixed-rate mortgage instead.

The Benefits of a 30-Year Fixed-Rate Mortgage

A 30-year home mortgage with a fixed interest rate usually has a payment that remains the same throughout the duration of the loan. Certain home loan factors can cause the monthly payment to vary; however, the loan is more stable than its alternative, the variable-rate, or adjustable-rate, mortgage.

This type of home loan gets its name from the number of years a borrower has to pay off the loan. By allowing a person to extend a loan to 30 years, the new mortgage made home loans an affordable option for many individuals. For example, a $250,000 home loan with a 5 percent interest rate could have a set monthly payment of $1,342 per month (not adding in insurance or taxes). In some locations, that is less than the average price of rent.

The Cons of a 30-Year Fixed-Rate Home Loan

While the extended payments led to a market boom in the past, many lenders are now considering the loan a high risk. This stems from the economic downfall of the housing market bubble. While some problems occurred because sub-prime loans allowed under-qualified individuals the opportunity to take out home loans on houses they couldn't afford, part of the problem was the instability of the market.

A term of 30 years can see several economic shifts. In the dramatic downfall, property values decreased, leaving many buyers upside down on their loans. Individuals who needed to sell a house couldn't. Some opted to walk away from their mortgages, choosing instead to file bankruptcy or other debt-management solutions.

While the 30-year mortgage remains an option, don't be surprised if your lender offers you a 15-year home loan.

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The Benefits of the 15-Year Fixed-Rate Mortgage

Most 15-year fixed-rate home loans work the same way as the 30-year variety. However, the term is for 15 years, not 30. Where this option really shines is the cost of the loan. If you only compare the monthly payment, the 30-year loan seems like a better option. It gives you a fixed monthly payment for the principal and interest and a lower payment. However, interest changes the equation.

Consider the amount of interest you pay for a $170,000 home. Assuming the interest is 7 percent, you would pay $237,165.13 in interest for a 30-year loan. Comparatively, you would only pay $105,041.45 in interest for a 15-year loan.

Which Mortgage Is Right for You?

Mortgage calculators can help you determine which home loan you can afford. However, mortgages aren't one-size-fits-all solutions. Some individuals may find it better to secure a 30-year note because the payment is lower. As long as your bank allows you to prepay the loan, you can pay extra each month and payoff your mortgage early. If you finish paying by year 15, you'll have only paid a little extra in interest; however, you would have had flexibility with the payment schedule.

Some people can put the money they save each month with the longer term to better use. Typically, this group will include people who need to build an emergency fund, those who need to save for retirement and those who do are just starting their careers.

Overall, the 15-year fixed-rate mortgage will save you money, but it may not be the best option for your financial situation. Find out how your loan's term and interest rate can affect your payments by using our mortgage calculator.