30-Year Fixed-Rate Or 15-Year Fixed-Rate?

Even the most casual observer of interest rates can tell you what the current rate is on a 30-year fixed-rate mortgage, but ask them about the 15-year fixed-rate and they’re likely to give you a blank stare. The 30-year fixed-rate may be the one you hear about the most, but that doesn’t mean it’s the only mortgage option or even the best option. In some instances, a 15-year fixed-rate might be a better choice.

Which is better? Which makes more sense for your situation? Let’s take a look at benefits of a 30-year and the benefits a 15-year:

Why a 30-year fixed-rate mortgage may be best for you: Although the interest rate on a 30-year fixed is typically one-half of a percent higher than the rate on a 15-year fixed, the main draw of a 30-year fixed is the lower monthly mortgage payments. On average, your monthly payments will be 30 to 40 percent less with a 30-year fixed, although that figure can vary depending on your specific type of loan, whether or not you pay points, etc. Another advantage of having a 30-year fixed is the federal income tax deduction. With a 30-year fixed-rate mortgage, you can take maximum mortgage interest tax deduction each year—which can greatly reduce or even eliminate your tax liabilities. Finally, a 30-year fixed-rate mortgage can give you more flexibility in terms of buying the house you want; the lower monthly payments may allow you to afford a larger home or a higher-priced home.

Why a 15-year fixed-rate mortgage may be best for you: A one-half percent lower rate may not seem like much on the surface, but the savings on interest over the life of the loan can be quite significant. As an example, let’s assume a $250,000 mortgage with an interest rate of 5.25 percent for 30 years. The total amount of interest you’d pay over 30 years is approximately $246,000. In comparison, the total amount of interest you’d pay with a 15-year fixed rate at 4.75 percent (a 0.5 percent lower interest rate) is approximately $100,000—a savings of $147,000 over the life of the loan. Also, you can build home equity much quicker with a 15-year fixed-rate mortgage since you’ll be paying off the principle at a faster rate. Finally, a 15-year fixed-rate allows you to pay off the loan sooner. If, for example, you’d prefer not to have monthly mortgage payments when you retire or when you start paying for your children’s college tuition, a 15-year fixed provides this option.

As always, you should crunch the numbers and consult with your mortgage professional before deciding on what type of mortgage is best for you. ∆