In 2017, when I first wrote about the 15 vs 30 Year mortgage, interest rates were very low. At that time, my conclusion was that the 30 year loan was typically superior. Now that mortgage rates are much higher, I felt it was important to revisit this topic.
Let’s break it down with some numbers. Let’s assume you’re looking to buy a $350,000 home with a loan of $280,000.
With a 30-year mortgage at 6.875%, your monthly payment would be $1,839, and you would end up paying $382,000 in interest over the life of the loan. On the other hand, with a 15-year mortgage at 6.25%, your monthly payment would be $2,401, and you would end up paying $152,000 in interest over the life of the loan.
With interest rates as high as they are, you can easily see the enormous amount of interest you would pay.
In fact, you pay $230,000 more in interest with the 30 year loan. But does that now make the 15 year loan superior? Let’s see.
Since the 30 year mortgage costs $562 less per month, you could invest that amount for the next 30 years and earn a nest egg of $567,000 at a 6% interest rate.
Alternatively, the 15 year loan would afford you the opportunity to invest $2,401 per month after the loan is paid off in 15 years. So, from year 15 to 30, this would grow to a nest egg of $702,000 at a 6% interest rate.
So, initially it looks like the 15 year loan is best since it provides $135,000 more in wealth.
If we increase the investment return to 7%, then the 30 year loan provides a nest egg of $690,000, while the 15 year loan equals $765,000. The wealth gap closes, but the 15 year loan still has the edge.
You would have to earn at least an 8% annual investment return for the 30 year loan to be better. This is considerably different from when interest rates were much lower.
| 15 Year Loan (6.25%) | 30 Year Loan (6.875%) | Difference | |
| Monthly Payment | $2,401 | $1,839 | $562 |
| Total Interest Paid | $152,000 | $382,000 | $230,000 |
| Future Investment (6%) | $702,000 | $567,000 | $135,000 |
| Future Investment (7%) | $765,000 | $690,000 | $75,000 |
| Future Investment (8%) | $836,000 | $843,000 | $7,000 |
| Future Investment (9%) | $915,000 | $1,037,000 | $122,000 |
Take Aways
- 15 year loans are now far more attractive than they used to be.
- If rates lower again significantly (under 4.00%), then the 30-year loan becomes much more attractive.
- If you don’t have the appetite to take the risk required to earn 8% on your investments, then a 15-year loan is probably best for you.
- If you believe your investments can earn more than 8% per year, then a 30 year mortgage might be right for you.
- You can’t just look at situations in a vacuum. What was true in the past may not be true today. It would not be wise to say that a 30 (or 15) year loan is always best. It must be continually evaluated.
In conclusion, there is no right or wrong answer when choosing between a 15-year and 30-year mortgage. It ultimately comes down to your financial goals, your risk tolerance, and what makes the most sense for your budget. If you’re unsure, consider speaking with a financial advisor who can help you weigh the pros and cons of each option and make the best decision for your unique situation.
Please comment below and let me know how higher interest rates have impacted your home buying and mortgage decisions.
Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™
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