Choosing a loan term is one of the biggest money decisions in buying a home, and it comes down to a trade-off: a lower monthly payment now, or far less interest over the life of the loan. Here is what the numbers look like on a typical loan.
The short version
- On a $300,000 loan at 6.75%, the 30-year payment is $1,945.79 and the 15-year payment is $2,654.73 (principal and interest).
- The 15-year loan costs $708.94 more a month but saves about $222,600 in interest.
- Lenders usually charge a lower rate on 15-year loans, which widens the gap further.
- Adding $200 a month to the 30-year loan pays it off about 7 years early and saves about $110,000.
Side by side
| $300,000 loan at 6.75% | 30-year | 15-year |
|---|---|---|
| Monthly principal & interest | $1,945.79 | $2,654.73 |
| Number of payments | 360 | 180 |
| Total interest | $400,486 | $177,851 |
| Total paid | $700,486 | $477,851 |
Same rate on both is a conservative comparison. In practice, 15-year mortgages typically carry lower rates than 30-year ones, so a real 15-year quote would save even more. Ask lenders to quote both terms.
Why the 15-year saves so much
Interest is charged on the balance you still owe. With a 15-year loan, a bigger share of each payment goes to principal from the start, so the balance falls fast and less interest builds up. In the first month of the 30-year loan above, $1,687.50 of the payment is interest and only $258.29 reduces the balance.
Why most people still choose 30 years
- Affordability. The lower payment makes it easier to qualify and leaves room in the monthly budget.
- Flexibility. You can pay extra on a 30-year loan when you can afford it, but you can’t pay less than the 15-year payment in a hard month.
- Other goals. Money not going to the mortgage can go to an emergency fund, retirement savings or paying off higher-interest debt.
The middle option: a 30-year loan with extra payments
Paying an extra $200 a month toward principal on the $300,000, 30-year loan above pays it off in about 23 years instead of 30, with total interest of about $290,600 instead of $400,500. You keep the lower required payment as a safety net.
Example
Natalie and Josh in Raleigh can afford $2,700 a month but want a cushion because Josh’s income varies. They choose the 30-year loan at $1,945.79 and set up an automatic extra $200. In months when money is tight, they can skip the extra payment without any penalty, as long as their loan has no prepayment penalty and the lender applies extra payments to principal.
Don’t forget the rest of the payment
Your real monthly housing cost also includes property tax, homeowner’s insurance, possibly HOA dues, and private mortgage insurance (PMI) if you put down less than 20% on a conventional loan, according to the Consumer Financial Protection Bureau. Our mortgage calculator includes tax and insurance so you see the full payment.
How to decide
- Can you afford the 15-year payment and still save for emergencies and retirement? If yes, it saves the most.
- If the 15-year payment would stretch you, take the 30-year and pay extra when you can.
- Compare actual quotes for both terms, including rates and fees, before deciding.
See how interest works over time in how compound interest works, which is the same math working against you on a loan.
How much you owe over time
| Remaining balance on $300,000 at 6.75% | 30-year loan | 15-year loan |
|---|---|---|
| After 5 years | $281,627 | $231,200 |
| After 10 years | $255,903 | $134,871 |
| After 15 years | $219,886 | $0 |
| After 20 years | $169,459 | — |
After 10 years, the 15-year borrower owes about half of what the 30-year borrower owes. That gap is home equity, which matters if you plan to sell, refinance or borrow against the home.
Biweekly payments
Some borrowers pay half the monthly payment every two weeks. That adds up to 26 half payments, or 13 full payments a year instead of 12, which works like a small extra payment toward principal. Before setting this up, confirm your lender applies the extra to principal and doesn’t charge a fee for the arrangement; you can get the same effect by adding one-twelfth of a payment to each monthly payment.
Refinancing later
Some people take a 30-year loan now and refinance to a shorter term if rates fall or their income rises. Refinancing has closing costs, so it only pays off if the savings exceed them over the time you expect to stay in the home.
