30 Year Mortgages – The Best Option for Most People

30 Year Mortgages are the most popular mortgages today. Still, if you are in the market for a new mortgage, either because you are buying a new home, or because you are refinancing your existing mortgage, there is one question you will very likely face.  “Should I get a 30 year mortgage or a 15 year mortgage?”  It’s a question that homeowners have been facing for many years.

Back in the days of mortgages with double-digit interest rates (if you’re young, you probably didn’t know that mortgage rates were around 15% in the early 1980’s), the payment on 15 year mortgages would only be about $100 more per month than the payment on 30 year mortgages.  That’s because interest accounted for almost all of the mortgage payment, so changing the term of principal payment had a relatively small effect on the amount of the total monthly payment.

With today’s low mortgage rates, however, it’s a bit of a different story.  The lower the interest rate, the greater the difference between the monthly payment on 30 year mortgages and 15 year mortgages.  In fact, at today’s rates, the monthly payment on a 15 year mortgage will be approximately 45% higher than the monthly payment on a 30 year mortgage (excluding the escrow portion of the payment.)  Let’s look at an example to illustrate the point.

Suppose you borrow $150,000 on a new mortgage.  According to a recent Freddie Mac survey, the average interest rate on 30 year mortgages is 4.84%, while the average rate on 15 year mortgages is 4.51%.  Using these rates, your monthly principal & interest payment on a 30 year mortgage would be $790.63, and your monthly principal & interest payment on a 15 year mortgage would be $1,148.26.  The 15 year monthly payment is over 45% higher than the 30 year monthly payment.  That’s a pretty big difference in the payment amount.

On the other hand, your interest savings over the life of the loan can be substantial if you go with the 15 year mortgage.  In this example, your total principal & interest payments over the life of the 30 year mortgage would be $284,627, compared to just $206,687 over the life of a 15 year mortgage.  That’s a pretax savings of almost $78,000 with the 15 year mortgage.

So are the savings from the 15 year mortgage worth the higher payment?  It really depends on your personal situation, but for most people I would say “probably not.”  If you should experience a loss of income during the life of your mortgage, that higher payment could create a real hardship for you, possibly causing you to fall behind in your mortgage payments and putting you at risk of foreclosure. 

For most people, I would recommend getting a 30 year fixed rate mortgage and making additional principal payments as you are able to.  That approach gives you the benefit of an accelerated payoff, while still giving you the flexibility to make the smaller “regular” payment during lean times.

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