15-year vs 30-year mortgage
A 15-year mortgage has a higher monthly payment and usually a lower rate; a 30-year mortgage has a lower payment and far more total interest.
Enter one loan amount and a rate for each term to see both payments, the interest gap and how fast each loan builds equity.
Switch on the investing option to test the common counterargument: take the 30-year loan and invest the payment difference.
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What decides it
- Monthly payment
- Halving the term does not double the payment, because less interest builds up. On a $300,000 loan the 15-year payment in the example below is about 31% higher, not 100% higher.
- Rate gap
- Lenders usually price 15-year fixed loans below 30-year loans. The larger the gap, the larger the interest saving from the shorter term.
- Total interest
- Interest accrues on the outstanding balance each month. A 30-year loan keeps a large balance outstanding for longer, so total interest is often more than double.
- Equity and flexibility
- A 15-year loan pays down principal much faster. A 30-year loan keeps the required payment lower, and extra principal payments can still shorten it if the budget allows.
- Investing the difference
- Investing the payment difference can close the gap only if the invested money earns clearly more than the 30-year rate after taxes, because the 30-year borrower also pays a higher rate on a larger balance for longer. The break-even return depends on both rates, and returns are not guaranteed.
How it works
Payment = P × r ÷ (1 − (1 + r)^−n), with r = annual rate ÷ 12 and n = 180 or 360 months. Total interest = payment × n − P. With investing, both households spend the larger payment each month and invest what their own loan payment leaves over.
Assumptions
- Both loans are fixed-rate and fully amortizing with monthly payments; interest is the annual rate ÷ 12 on the remaining balance.
- Taxes, insurance, PMI, points and closing costs are excluded, as is any mortgage-interest tax deduction.
- Equity is loan principal repaid; the down payment and home price changes are the same under either term.
- The investment option uses one constant annual return, compounded monthly, with contributions at month end and no taxes, fees or volatility.
Worked example
$300,000 at 5.75% for 15 years versus 6.5% for 30 years
The 15-year payment is $2,491.23 and the 30-year payment is $1,896.20, a difference of $595.03 a month. Total interest is $148,421.45 on the 15-year loan and $382,633.47 on the 30-year loan, so the shorter term saves $234,212.02. If the 30-year borrower invests the $595.03 difference at 6% a year, and the 15-year borrower invests the full $2,491.23 after the loan is paid off, the 15-year plan is ahead by $126,783.62 after 30 years.
Step by step
- Work out both payments. $300,000 at 5.75% ÷ 12 over 180 months is $2,491.23 a month. At 6.5% ÷ 12 over 360 months it is $1,896.20. The difference is $595.03 a month, about 31.4% more for the 15-year loan.
- Total the interest. Payments minus principal: $2,491.23 × 180 − $300,000 = $148,421.45 for the 15-year loan and $1,896.20 × 360 − $300,000 = $382,633.47 for the 30-year loan (using unrounded payments). The 15-year loan saves $234,212.02, the headline.
- Compare equity at the check year. By the end of year 10 the 15-year loan has repaid $170,361.64 of principal and the 30-year loan $45,671.62. At year 15 the 15-year loan is paid off while the 30-year balance is still $217,677.42.
- Switch on investing the difference. Both households now spend $2,491.23 a month. The 30-year household invests the $595.03 difference at 6% from month 1, reaching $173,044.75 by year 15, still $44,632.67 short of its loan balance. From month 181 the 15-year household invests its full $2,491.23 a month.
- Compare after 30 years. The 15-year plan holds $724,496.38 of investments and the 30-year plan $597,712.76, both with no mortgage left. The 15-year plan is ahead by $126,783.62.
How to read your result
With investing off, the headline is the total interest saved by the cheaper loan, and the summary gives both payments. The results list each payment, the monthly difference, each loan’s total interest, and the principal each has repaid by the equity check year. Equity here is loan principal repaid only; the down payment and any change in the home’s value are the same under either term. The chart and table show each loan’s balance at the end of every year.
With investing on, the headline becomes the gap in net position after 30 years, where net position is investments minus the remaining loan balance. Four more results show each plan’s net position at years 15 and 30, and the chart switches to those net positions. The 15-year plan shows $0 at year 15 because its loan has just been repaid and its investing has not started.
Property tax, insurance, PMI, closing costs, and points are excluded. So are the mortgage-interest deduction, taxes and fees on investments, and market swings; the investment line assumes the same return every month. All amounts are nominal dollars, not adjusted for inflation.
What changes the result most
- The rate gap
- The interest saving comes from both the shorter term and the lower rate. Raising the 15-year rate from 5.75% to 6% lifts its payment to $2,531.57 and cuts the saving from $234,212.02 to $226,950.78. At 6.5%, the same rate as the 30-year loan, the payment is $2,613.32 and the saving $212,235.49.
- Investment return (with investing on)
- At 7% the 15-year plan still leads by $63,711.37 after 30 years; at 8% the 30-year plan leads by $24,742.02. With these loan rates the two plans tie at a return between 7.75% and 7.76%, well above the 6.5% 30-year rate, because the 15-year borrower also pays a lower rate.
- How long the loan is kept
- Most of the saving comes late. Over the first 10 years the 15-year loan costs $128,585.99 of interest and the 30-year loan $181,872.87, a gap of $53,286.88, while the 15-year borrower has paid $71,403.14 more in total payments and holds $124,690.02 more equity. A sale or refinance after a few years captures only part of the lifetime saving.
Questions
Is a 15-year mortgage better than a 30-year mortgage?
It costs far less in total interest and builds equity faster, but the required payment is higher. Which one fits depends on whether the higher payment leaves room for savings, emergencies and other goals.
Are 15-year mortgage rates lower than 30-year rates?
Usually. Lenders take less interest-rate risk over a shorter term, so 15-year fixed rates are typically below 30-year fixed rates. The gap varies with the market and the borrower.
Can I pay a 30-year mortgage off in 15 years?
Yes, if the loan has no prepayment penalty and you pay enough extra principal. On the example loan, paying the 15-year payment of $2,491.23 on the 30-year loan would still take longer than 15 years, because the 30-year rate is higher.
Does investing the difference beat a 15-year mortgage?
Only when the after-tax return is high enough to outweigh both the higher 30-year rate and the longer payoff. With the example rates of 5.75% and 6.5%, the plans come out even at a return of about 7.75%: at 6% the 15-year plan finishes $126,783.62 ahead after 30 years, and at 7% it still leads by $63,711.37.
Can I refinance from a 30-year to a 15-year mortgage?
Yes, lenders offer rate-and-term refinances into shorter terms. Closing costs apply, so compare them with the interest saved.
How much extra does it take to pay off a 30-year mortgage in 15 years?
On the example loan, $300,000 at 6.5%, a payment of $2,613.32 a month clears it in 15 years, $717.12 more than the required $1,896.20. That is $122.09 more than the 15-year loan’s $2,491.23 payment, because the 15-year loan in the example has a lower rate.
More in Compare
Sources
- CFPB: understand the different kinds of loans available
- CFPB: what is a prepayment penalty?
- Investor.gov compound interest calculator
These references explain the concepts behind the calculation. They do not endorse this site. Estimates leave out any cost or condition you did not enter.