New 15 Year Mortgage vs 30 Year Mortgage – Which is the best option?



When it comes to buying a home, there are two very popular mortgages to choose from – you can choose the 15 year fixed rate mortgage or the 30 year fixed rate mortgage.

Far and away the 30 year mortgage is the most popular option for Americans with only 10% (!!) selecting the 15 year mortgage. But just because the 30 yr mortgage is the most popular option, does it mean that is it is the BEST option? Well that is what I set out to discuss in this video.

The 15 year mortgage does indeed come with perks. First of all it will generally have a lower interest rate…and being that you pay it off in literally half the time fo a 30 year mortgage, you are going to save yourself a boat load on interest with the 15 year mortgage. (I’m taking more more than double the interest if you go with the standard 30 year mortgage…that translates to tens if not hundreds of thousands of dollars depending on the size of your mortgage.)

So from a numbers perspective, I bet you are going to be thinking that the 15 year mortgage is the way to go. 100%, right? And being that I am a HUGE fan of saving money, I bet that is what you think I am going to recommend.

Well, no so fast.

We have to take a moment to consider the opportunity cost of our money.

If you go with a 15 year mortgage, you far a significantly higher monthly payment – which can greatly reduce your ability to save and invest your money. However, if you choose a 30 year mortgage, you face a lower monthly payment – which opens up more options for saving and investing your money.

Remember, time is your best friend when it comes to investing your money. Time is what allows compound interest to work it’s magic and grow your net worth.

So once we start to factor in that opportunity cost of your money – aka – factoring in what would happen if you invested the difference between your 15 yr monthly mortgage payment and that 30 year monthly mortgage payment, which option comes out ahead. Well you are going to have to tune in to find out!

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22 comments

  1. Thanks for the video. An important consideration for a 15 v 30-year mortgage goes beyond the principle and interest. Property taxes are also a significant factor in the amount paid per month, especially depending on where they live. The 'monthly bill of $1500' in this example for a 15-year could easily $1900-$2000 with the local property taxes and other municipality taxes. The difference can be a significant deterrent for many homeowners when they have other financial goals and responsibilities as with the 30-year mortgage the total monthly payment would be more likely approximate: $961 + local taxes- probably closer to $1400- $1500 total. Some of the obvious financial goals that would require the additional cash the 30 year mortgage provides would include retirement (ROTH, traditional IRA accounts, 401K, 529, HSA, childcare, etc). There can be advantages of the 15-year mortgage but it carries with it its own risks and rewards.

  2. Heath McConnell

    I split the difference and went with a 20-year mortgage.

  3. 15vs 30 what about paid off😃

  4. You are forgetting a lot of factors. What do you do for a living. What happens if corporate America turns on you in your 50s. You lose your job. If your house is paid off it changes everything. less debt is better in the real world in most cases. You also forgot to factor in the value of the lower rate on the 15 yr.

  5. Discipline, as you say is the key, but you just said that 80% of Americans are living paycheck to paycheck. It is highly unlikely that the investments will be continued without being “forced”. Also, there is no guarantees to growth in investments.

  6. After paying off a 15 year mortgage, how can you say they have a net worth of zero? The home value is all theirs!

  7. Tony Flaminio

    Great information Erin you covered so much it’s a really easy decision for the disciplined saver and investor. I plan to share it with my three millennials thank you for your video.

  8. Robert Marlo

    I wish I had listened something similar when I took mortgage and then refinanced to 15 years .. auto investing is the key and to index fund like no brainer yet many still yet to learn ..I am making sure my daughter learns about power of compounding and hopefully I will have a few millions saved for her .. before 20, hopefully I can convince her to read J Collins book .. do you have any recommendations on how to get kids accounts ready , I do have a custodian account but only adding small amounts as there is a tax if it exceeds more than around 1k per year I believe

  9. David Boeger

    Mathematically, it's just a matter of leverage. Debt lets you buy something you can't afford yet (with additional interest cost) at the risk of going underwater on the asset. Of course, if we assume home appreciation and good positive returns on investments, then obviously the more low-interest debt, the better. This is why businesses borrow money to expand in the hopes of making more money. It's about how much risk you're willing to take for the opportunity. It would not have been a good move buying a home in 2007, for example. It's easy to make a 30-year mortgage sound like a no-brainer if you ignore the risks.

    That being said, when it comes to somebody's home, there are variables other than money which complicate the issue somewhat. A home can provide much more lifestyle value than the numbers would suggest, especially in the case of families with kids or people with special needs, disabilities, etc. who really benefit from having their own space. Most people are hesitant to move neighborhoods if it means transferring their kids to a new school mid-year, for example. At that point, the money isn't the only consideration. In some sense, while the higher sustained debt level and interest cost of the 30 year mortgage is mathematically higher, the practical lifestyle risk is often perceived to be lower, because mortgages generally have more favorable terms than other forms of debt, namely being non-callable and having lots of recourse for avoiding foreclosure and eviction. Therefore, having lower monthly payments and being able to defer a more significant portion of repayment to later in one's career can actually decrease the risk of being evicted in the event of an unforeseen setback such as a job loss. For many people, this is actually a bigger deal than the numbers. To use families with kids in school as an example again, if people could see the future and know if they were going to be foreclosed at some point with a 15 year mortgage but spend more money overall with a 30 year mortgage, a single person who only cares about the money might still take the 15 year, while most parents would take the 30 year without hesitation, because the foreclosure is a more significant consequence than spending more.

    Basically, when buying a home, you need to balance not just which options make the most financial sense, but also which ones make sense for your intended lifestyle. It's very easy to look at the 15 year and see all the savings, or look at the 30 year and see all the potential for investing the difference, but in many cases, it's actually sending the kids to school or being able to depend on having a safe home in retirement that matters most, in which case the 30 usually wins out by having the most flexibility and being the lesser burden on a month-to-month basis. Even then, some people swear by the 15 because they know they want to pay it off early anyway and not owe any bank for their home. It's kind of a personal preference.

  10. How does the calculation change if you are 50 rather then 30? Especially with regards to the tax liability?

  11. Vivek Joseph

    what if the mortage rate is 6.5 to 9 percent?

  12. I did a 15 year, paid it off in 11. It was only $120 more per month. I agree with the reasoning behind a 30 year, but I wouldn’t have done it any other way. The way that ‘paid off’ feels to my anxious self is worth that $25k opportunity cost 100%. I could quit my job and work at McDonalds (rather Dunkin’ Donuts, it’s the only fast food restaurant we have here…) and have the same lifestyle as we do now. I’m now investing that bi-weekly payment into index funds to save up for a down payment for a rental property, which I will absolutely be getting a 30 year mortgage on! Yes for 30 on investment property, a hard “no” for my primary residence. I LOVE being paid off! My net worth and investments are good for my age, and can now save almost 50% of my income, with an additional 10% over that for charity. My investments now, if I didn’t add any more, at 7%, will still grow to a million by the time I’m 68, and I’m still investing, plus will have at least one rental property by the time I “retire” at 55 (prob barista b/c of health insurance and the fact that I like to work…).
    I’ve nearly been furloughed twice in the last 18 years of working this job, and my biggest fear has been the house payment (I teach in a very rural area – 3 traffic lights in the entire school district, which is in the top 10 biggest area coverage districts in my state – so there is no industry or jobs to fall back on) and being able to live now on a very low paying job is golden for the psyche! Different strokes for different folks, but I wouldn’t trade my 15 year mortgage for anything, even now that I am financially literate and know the differences and the opportunity costs involved (wasn’t at the time: I rented for 7 years before buying because I was so afraid of losing my position (rural schools are very poorly funded, and music is always on the chopping block…), having to move, and resale is very stagnant here so I didn’t want to own a house and have to pay the mortgage on an empty unsold house if I moved away. When I finally bought, it was the guy at the local bank that gave me the comparison between 15 and 30 year mortgages, and to my frugal, debt-hating self that sounded like the right choice at the time (it was!). I’ve learned a lot since then, but I’m still happy with my mortgage decision. What I’m not happy with is leaving my Roth contributions automatic and low as my income increased for so many years. I could be much further along by now if I had a clue then (had enough of one from my father to set one up when I graduated college, but then left the contributions the same for almost 10 years!!! I preach Roth’s to my colleagues and students all the time now, and am busy trying to make up as much as I can by maxing it and my wife’s out every year….

  13. I wish these videos were around 12 years ago when I first purchased. I was financially illiterate and would put extra funds into principal vs investing. While I was still making okay financially decisions I could have been doing much better. Paid off my house at 32 and then sold and bought a nicer home at 33. I only have 5 years left on my new house 2 years later but definitely could have been investing vs paying off mortgages. Now at 35 years old I finally get it 🙂 still got plenty of time to let the market do its thing but I could have way more invested than my 160k. Great content and this applies directly to me! So thank you! Keep it up!

  14. This is great info. Keep it up. You are going places. Great video.

  15. natebonebusta

    Time allowed for compounding is the biggest factor. The second being the low interest rates. I'll take the 30 year, invest the difference, and ride the compounding wave into an early retirement. Your examples were great, and your presentation was excellent. Nice job!

  16. Very interesting! Keep the knowledge coming

  17. Andrew Minter

    Great informative video! I'm curious how a 30 year mortgage paid off in 15 years would compare to either the 15 year or 30 year mortgages. Presumably you still loose out on the opportunity cost of having investments grow, but is there any advantage to this?

  18. What would you say is the best way to guarantee 8% interest though?

  19. Very interesting and clear, thanks!

  20. Mavutive Personal Finance & Lifestyle

    Interesting to hear a more in depth view on this topic. I'm still a bit shocked about how high your interest rates are. 2,5% is the interest rate for a car loan here.

  21. Dexter Morgan

    I'm currently 31 and did a 15 year mortgage when I bought my place at 25 at 3.375% fixed rate. I only owe 60k on it and I have 60k in the bank. I plan to pay it off in the next few years or so.. right now I'm working on growing a strong stock portfolio! My current net worth is right around 250k.

  22. Evelyn Waugh

    Found you after I saw the comment you left on one of Graham Stephens videos. liked and subbed.
    👍

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