Glossary · Definition
15-year vs 30-year mortgage
A 15-year mortgage cuts total interest by 50-65% but typically doubles the monthly payment. A 30-year keeps payment low and lets you invest the difference. Which wins depends on your investment-return assumption and cash-flow priorities.
Definition
A 15-year mortgage cuts total interest by 50-65% but typically doubles the monthly payment. A 30-year keeps payment low and lets you invest the difference. Which wins depends on your investment-return assumption and cash-flow priorities.
What it means
On a $320K loan at 6.5% (30-year) vs 6.0% (15-year, since shorter loans price slightly lower), the monthly P&I is $2,022 (30) vs $2,700 (15). Total interest over loan life: $408K (30) vs $166K (15) — the 15-year saves $242K in interest. But that extra $678/month for 15 years invested in S&P 500 at 7% real returns becomes about $214K. The investment alternative is roughly equivalent in net wealth, with the 30-year giving more flexibility (you can stop the ‘extra’ investment in lean years).
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Why it matters
The classic 30-year-and-invest argument depends on actually investing the difference. Many 30-year borrowers spend the lower payment on lifestyle creep instead, ending up with a longer mortgage and no extra investments. The 15-year is a forcing function for forced savings. The 30-year is the right answer for disciplined investors with good behavior controls (auto-invest the difference); the 15-year is the right answer for everyone else.
Example
$320K at 6% (15-year) → $2,700/month, $166K total interest. $320K at 6.5% (30-year) → $2,022/month, $408K total interest. Difference: $678/month for 15 years. Invest that at 7% in tax-advantaged account: $214K balance at year 15.
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Frequently asked questions
Why are 15-year rates lower?
Less risk to the lender — shorter loan = less time for borrower default or rate-environment changes. Typically 0.25-0.5% lower than 30-year rates.
Can I always afford a 15-year?
If the 15-year payment exceeds 28% of gross income, you can’t. Most personal-finance experts use the 28% rule as the affordability ceiling.
What about the 20-year mortgage as a middle ground?
Available but rare. Few borrowers use it because 30-year offers flexibility and 15-year offers fastest payoff. 20-year occupies an awkward middle.
Related terms
- DefinitionMortgage interestMortgage interest is the cost of borrowing money to buy a home, calculated monthly on your remaining principal balance. Because each payment retires some principal, interest paid declines over time — and that’s why early prepayment saves dramatically more than late prepayment.
- DefinitionAmortizationAmortization is the process of paying off a loan with equal periodic payments that are split between interest and principal. In the early months, most of your payment goes to interest; as the balance shrinks, more goes to principal.
- DefinitionCompound interestCompound interest is interest earned on both your original money AND the interest it's already earned. Over long periods, this 'interest on interest' effect is what turns modest monthly contributions into retirement-level balances.