Are you planning to buy a house?

Maybe that day is soon. Or maybe it's many years down the road.

But it's never too early to start thinking about your options for financing a home.

Chances are you're going to take out a mortgage. And you’ll pay the mortgage over a fixed time period. Usually that’s either 30 or 15 years.

The 30-year and 15-year mortgage each has its pros and cons. But many finance experts swear by the 15-year mortgage. And there are two big reasons they say it’s better:

1. It'll save you a boatload of money in interest.
2. You'll gain equity in your home more quickly.

But how true is this? Is it really better?

I’m not so sure. Let's investigate these claims.

Note: This post is pretty math-y. I like numbers. And if they’re your thing, then this is for you. But if they’re not, I understand - that’s cool too. Feel free to skim through to the conclusions.

Reason 1: "It'll save you a boatload of money"

You Will Pay a Lot Less Interest...

With a 15 year mortgage, you will pay a lot less interest over the life of the loan. This is definitely true. Your loan will be paid off 15 years sooner. That's 180 fewer months of interest to compound.

And in addition, you'll get a lower rate on the 15 year loan.

Let's look at an example and see just how big the difference can be.

Loan Amount

Here is the home we are buying and how much it is going to cost us.

House Price	$400,000
Downpayment	$80,000
Mortgage Amount	$320,000

Financing Options

We have two mortgages we can choose from to pay for our house.

	Mortgage Term	Interest Rate (annual)
Option A	15 years	3.5%
Option B	30 years	4.1%

Using a mortgage calculator, we find the monthly payment under each plan as well as the total interest paid.

	Monthly Payment	Total Principal	Total Interest
Option A (15 years)	$2,288	$320,000	$92,000
Option B (30 years)	$1,546	$320,000	$236,000

We find that with Option A we pay about $92,000 in interest over the life of the loan. That sounds like a lot. But with Option B we pay a whopping $236,000!!

That's a huge difference! But before we go yelling about how much better a 15-year mortgage is, let’s think about this for another minute.

The 15-year mortgage has a much higher monthly payment, so we are paying more money today. And one dollar is worth more today than it will be in 15 years.

So we need to consider whether it’s really better to be paying so much right now.

...But You Will Also Lose a Lot in Potential Interest

By paying more each month, you lose the opportunity to invest in the market. Let’s see just how much you might be losing out on.

With Option A you have a higher monthly payment, but that payment goes away completely after 15 years.

	Monthly Payment (Year 1 - 15)	Monthly Payment (Year 16 - 30)
Option A (15 years)	$2,288	$0
Option B (30 years)	$1,546	$1,546
Difference	$742	($1,546)

By choosing the 30-year mortgage you save $742 each month for the first 15 years.

Assume you take the 30-year mortgage and invest the extra $742. With a 6% return, $742 now is worth $1,778 in 15 years. That covers the $1,546 needed for the 30 year mortgage payment!

Putting it another way, the present value of all your payments on the 30-year mortgage actually comes out to less than for the 15-year mortgage.

So even though you pay more overall with a 30-year loan, when you put it in terms of “today’s money” (assuming a 6% interest rate), the 30-year loan is actually cheaper.

	Payment	Months	Total	Present Value
Option A (15 years)	$2,288	180	$401,040	$271,136
Option B (30 years)	$1,546	360	$556,560	$257,860
Difference	$742	(180)	($155,520)	$13,276

Of course, the exact difference varies on your rate of return and the taxes you pay.

But the point is you don't really save any money with a 15 year mortgage, provided you invest the difference in the two monthly payments.

So it's technically true that you'll save a bunch in interest with a 15-year mortgage. But you'll lose out on potentially more interest from investing in the stock market.

If you are disciplined with your investing, then in reality a 15-year mortgage is no cheaper over the span of the loan.

Claim #2: You Will Gain Equity in Your Home More Quickly

The above discussion relied on one key assumption: that you fully own your home when you sell it.

But most people don't live in their home for 30 years. So they still have a balance on their mortgage when they decide to sell. Thus comes the concept of equity.

What is Equity?

Equity is the amount of your home that you actually own. Simply put, it’s the value of your home, minus the amount you owe on it. The less you owe, the more equity you have.

So you’ve lived in your house for eight years. How much do you still owe the bank?

Using the Amortization calculator, we find that with a 30 year mortgage we still have a balance of $269,000! With a 15 year mortgage we owe about $173,000.

That’s a pretty significant difference.

Why might you want equity faster?

There are a couple reasons that building equity quickly can be beneficial. Let’s take a look at these.

1. It may help if you ever refinance your mortgage

With equity in your home, you may be more likely to be approved for refinancing later on. And you may be able to get a lower rate on your refinancing.

So if you choose to refinance, having equity could save you money. Refinancing your mortgage can be beneficial in some cases. Generally when the interest rate drops 1-2% you should start considering the option.

On one hand, having higher equity means you could get a lower rate on your refinancing. On the other hand, being closer to the end of the mortgage reduces the overall benefit of refinancing. You don’t have as much interest left to pay off, so a lower rate doesn’t get you quite as far.

2. It can be easier to sell your home

In theory if you have equity in your home, you can use the proceeds of your home to go toward a downpayment on your next house.

After eight years in your home, say you’re ready to sell. You sell your home for $400,000.

With a 30-year mortgage, you pay off the $269,000 balance and keep the remaining $131,000. With a 15-year mortgage, you pay off the $170,000 balance and walk away with almost $230,000.

	Sale Price	Balance Paid	Net Cash from Sale
Option A (15-year)	$400,000	$170,212	$229,788
Option B (30-year)	$400,000	$268,646	$131,354
Difference		($98,434)	$98,434

That looks pretty great for the 15-year mortgage. You walk away with almost $98,500 more. But remember, we paid a lot more money to get there! $742 more each month for 96 months to be exact.

	Monthly Payment	Months	Value at Sale Time
Option A (15-year)	$2,288	96	279,093
Option B (30-year)	$1,546	96	188,643
Difference	$742	-	$90,451

We see that the return from investing $742 each month for eight years (at a 6% rate) is about $90,500. Subtract that from $98,500 and that makes the 15-year mortgage net gain closer to $8,000.

$8,000 isn't a small amount of money, but it's much smaller than it initially seemed. And this is an example, of course. The true difference in cost depends on a few key factors:

1. Interest rate difference in the 15-year vs 30-year mortgage. The bigger the difference, the better the 15-year mortgage looks.
2. The rate of return you get from investing in the stock market. The higher return from the market, the better the 30-year mortgage looks when all else is equal.
3. How long you stay in your home before selling. With the assumptions we made for this example, the 15-year mortgage looks better if you stay in your home for less than 15 years. Otherwise, the 30-mortgage looks better financially.

Ok, so which mortgage should I choose?

In some cases, the 15-year mortgage is financially advantageous, and in other cases the 30-year mortgage is financially better.

But the difference isn't so big that you shouldn't consider some other factors when making your choice.

Forced Savings

In reality, the major advantage of a 15-year mortgage looks like this: forced savings.

The success of the 30-year mortgage financially depends on your dedication to investing the amount you save in monthly payments.

You could take that 30-year mortgage and forget investing. Forget the stock market. You needed that new home theater system... And the trip to South Africa... And the Tesla...

And that’s where the key difference lies.

The 15-year mortgage forces you to make that high monthly payment above all else. It’s not up to your discretion each month so you won’t be tempted to spend it on other things.

Reasons to choose a 15-year Mortgage

Ultimately, the choice of a 15-year versus a 30-year mortgage isn’t as much a matter of money saved as it is with personal circumstances and comfort level.

Some reasons you might choose a 15-year mortgage:

1. You know yourself. You won’t be disciplined enough with saving and investing if you choose the 30-year mortgage.
2. Debt feels like a burden. You like the comfort of being debt-free so you want to pay the mortgage off sooner.
3. You plan to stay in your home for a short time period.

Reasons to choose 30-year Mortgage

Some reasons you might choose a 30-year mortgage:

1. You can’t afford a high monthly payment on the house you want.
2. You can afford a high monthly payment now but your job is volatile.
3. Lower monthly payments means higher flexibility. If a crisis arises, your money is more accessible.
4. You plan on staying in your home for the long term.

Conclusion

This article discussed in detail the financial gains and disadvantages of both a 30- and 15-year mortgage. From our example, a 30-year mortgage is better if you stay in your house longer than 15 years, and a 15-year mortgage is better otherwise.

But the difference isn't so significant that it can't be swayed by a few small changes in some of our assumptions.

Therefore the choice is really up to you.