Payment and Rate Difference
A 15-year mortgage typically carries an interest rate 0.5 to 0.75 percentage points lower than a 30-year mortgage. On a $400,000 loan at 7% (30-year) vs. 6.35% (15-year), the monthly payments are approximately $2,661 vs. $3,452 -- a difference of $791 per month, or $9,492 per year.
Total Interest Comparison
The 30-year loan produces total interest of approximately $558,000. The 15-year loan produces approximately $221,000 -- a difference of approximately $337,000. The 15-year borrower pays $791 more per month for 15 years ($142,380 in extra payments); the remaining $195,000 in savings comes from the lower rate and faster principal paydown.
The Investment Argument for the 30-Year
Some financial planners advocate taking the 30-year mortgage and investing the monthly payment difference. This assumes consistent investment discipline and a favorable long-term return -- neither guaranteed. The 15-year mortgage, by contrast, produces a certain, guaranteed interest saving.
Which Is Right for You?
Choose the 15-year if you can comfortably afford the higher payment and want to be mortgage-free sooner. Choose the 30-year if the 15-year payment would significantly constrain your budget or emergency savings, or if you have a strong investment discipline and a high-return alternative use for the difference.
A Middle Ground: Extra Payments on a 30-Year
Taking a 30-year loan and voluntarily paying it down on a 15-year-equivalent schedule captures most of the interest savings while preserving flexibility -- if income drops, you can revert to the lower required payment without risk of default, an option a true 15-year loan does not offer since the higher payment is contractually required every month.
Common Mistakes When Choosing a Term
Choosing 15 years purely to "save on interest" without stress-testing the payment. A payment that consumes too much of your budget increases the risk of missing a payment during a job loss or medical event.
Assuming the 30-year option requires paying it for 30 years. As shown above, a 30-year loan can be paid down faster voluntarily -- the term length is a payment-schedule ceiling, not a mandate.
Frequently Asked Questions
Can I switch from a 30-year to a 15-year later? Yes, through refinancing, though that means new closing costs. Voluntary extra payments on your existing 30-year loan achieve a similar effect without refinancing.
Do all lenders offer both terms? Most do, along with other options like 20-year and 10-year terms -- ask about the full menu, since a less common term might fit your goals better than the standard two.