There are many decisions when buying a home. One of them is what kind of loan product to use. With interest rates, payment terms and points it can be a little overwhelming. In this article we are going to compare and contrast two popular loan products the 30 Year and the 15 Year Loan. Here is a history of the interest rates for the two products over the last few years.



First let’s current mortgage interest rates. 30 Year Fixed Loans are at 5.85% and rates on 15 Year Fixed Loans are at 5.34%. What does this mean as far as your mortgage payment? People frequently assume that a mortgage payment on a 15 Year Loan would be twice as much as the mortgage payment on a 30 Year Loan, but this is not the case. Using a Mortgage Calculator we can determine the payments on a 200k house.

Mortgage Payment on 200k House
30 Year Fixed Payment (5.85%) $1179.88
15 Year Fixed Payment (5.34%) $1617.23

So while the payment on a 15 Year Loan is higher it’s not twice as much. The mortgage payment on a 15 Year Loan is 37% more than the mortgage payment on a 30 year loan. This is partially because the interest rate on a 15 Year Loan is usually lower. What is interesting is that even if the mortgage rate on the 15 Year Loan was 5.85% the payment would still not be twice as much.

Mortgage Payment on 200k House
30 Year Fixed Payment (5.85%) $1179.88
15 Year Fixed Payment (5.85%) $1671.54

So while the payment is a higher (by 42%) it’s still not twice as much. This is because less interest is paid on the loan due to the shorter time frame on the loan.

Now let’s look at the payments one would make over the course of the loan based on today’s interest rates.

30 Year Fixed Total Payments $424745.8
15 Year Fixed Total Payments $291101.4

So the total payments on a 30 Year Loan are 46% more. Does this mean that you should automatically get a 15 Year mortgage? Not necessarily. There are some benefits to get a 30 Year Mortgage. Getting a 15 Year mortgage might make your payments so high that you would not be able to save as much each month. And if you ran into hard times it might be beneficial to have some money in the bank since it is more accessible to pay unexpected expenses like doctors bills. Additionally, if you take the extra money you would otherwise be putting into your mortgage and invest it in the stock market you might be able to get a better rate of return.

One question that people frequently ask is what rate of return would you need to make it worthwhile to get a 30 Year Loan over a 15 Year Loan? There are different ways to think about this question. Let’s see what rate of return you would need to be able to take your money and pay off your mortgage in exactly 15 years based on current mortgage interest rates.

So you get a 30 Year Mortgage with a payment of 1179.88 instead of a 15 Year mortgage with a payment of 1671.54. So take the money you save each month by choosing a 30 year mortgage, $491.66, and put that money in the bank. If you were to receive a 30 Year Loan at 5.85% interest after 15 years you would have a remaining balance of $136,660 on your mortgage. So what rate of return would you need for your monthly $491.66 contribution to equal $136,660? It turns out you would need an 8.4% return. So if you are confident in your investments it might be a good idea to invest. If on the other hand you are simply going to put your money in a bank account it might be a good idea to consider a 15 Year Loan.

Ki is a real estate agent. He provides webmasters a free mortgage rates widget and a free mortgage calculator. He also runs a website that provides a free Austin MLS Search along with general information on Austin Real Estate.