15-Year vs 30-Year Mortgage: Which Actually Costs Less?

The 15-year mortgage is the better deal on paper and the wrong choice for plenty of households. Both statements are true, and which one applies to you comes down to cash flow and how disciplined you are with the difference.

The numbers, side by side

Take a $300,000 loan. On a 30-year term at 6.5 percent, the payment is $1,896.20 and you pay $382,633 in interest. On a 15-year term at 5.75 percent (shorter loans price lower because the lender carries less risk), the payment is $2,491.23 and total interest is $148,421.

The 15-year loan costs an extra $595 a month and saves $234,210. That is a return no bond market will offer, and it is risk-free.

Why the payment gap is the real question

The extra $595 has to come from somewhere. If it comes from an emergency fund that then gets depleted, the first major repair becomes a credit card balance. If it comes from retirement contributions, you are trading a tax-advantaged account for home equity you cannot spend without borrowing.

The rule of thumb worth following: fund the employer 401(k) match first, hold six months of expenses in cash, and only then consider a 15-year term. Retirement contributions have decades to compound; mortgage interest is deductible only if you itemize, and the 2017 tax changes made that far less common.

The third option: take the 30 and pay it like a 15

You can take the 30-year loan for the lower required payment and pay extra every month. On the $300,000 loan at 6.5 percent, adding $595 a month to the principal pays the loan off in about 16 years and 4 months with total interest near $187,000, close to the 15-year result but at the 30-year rate.

• Advantage: the extra payment is optional in a bad month.
• Advantage: you keep flexibility instead of locking in a higher obligation.
• Disadvantage: the rate is higher, so the identical payment saves less.
• Disadvantage: in practice, most borrowers do not sustain the extra payments.

When the 15-year is clearly right

• Your emergency fund is fully funded and you are already maxing tax-advantaged retirement accounts.
• The payment fits under 25 percent of gross monthly income, leaving room for the rest of life.
• You are within a decade of retirement and want the mortgage gone.
• You have an unusually stable income: tenured academic, government, established practice.

When the 30-year is clearly right

• You are early in your career and expect income to rise substantially.
• Childcare costs are about to consume a large share of your budget for several years.
• You are not yet contributing the full employer match on your retirement plan.
• Your income is variable: commission, contract, or business ownership.

The bottom line

The 15-year mortgage wins on arithmetic by a wide margin. The 30-year wins on flexibility, and flexibility has real value when your income is unstable or your budget is stretched. What does not work is taking the 30-year loan, telling yourself you will pay extra, and then not doing it. Run both scenarios through the calculator with your actual numbers before you decide.