This question has been very popular among the people looking to refinance, since the mortgage rates continue to be at historic lows.  (I heard that someone locked in at 4.5% the other day…)

In all reality, there are two main things to consider when deciding on a 30 year mortgage versus a 15 year mortgage.

1.  The difference in monthly payment.

Consider the fact that the minimum payment on a 15 year mortgage will be higher than the 30 year mortgage.  If you are financially in a position to comfortably make the minimum payment on the 15 year, then we highly recommend the doing the 15 year mortgage.  Now, keep in mind the 30 year mortgage has a lower minimum payment.  If you are doing a standard conventional mortgage, it will not have a prepayment penalty for paying down or paying off the mortgage early.  So, it might be a good idea to go ahead with the 30 year and make larger payments when you can afford them, since there is no penalty for those extra payments or early payoff.

2.  The amount of interest you save over the life of the mortgage.

We are going to use this example to show some numbers: 
$200,000 mortgage at a 5.0% interest rate for both the 30 year and 15 year.

The total amount of interest you will pay over the life of a 30 year mortgage is $186,513.24
The total amount of interest you will pay over the life of a 15 year mortgage is $84,685.48

That’s a whopping $101,827.76 difference in interest you will pay!!

Ok, ok, I know what you are thinking and that’s “I probably won’t stay in this house for 30 or even 15 years”.  That’s ok, we’ve given an example of more real numbers.

The total amount of interest you will pay in the first 5 years of a 30 year mortgage is $48,076.13
The total amount of interest you will pay in the first 5 years of a 15 year mortgage is $44,009.37

That difference is $4,066.76.  Yes, just in the first five years of your mortgage you will save $4066.76, when you choose the 15 year mortgage versus the 30 year mortgage.  Again, if you can afford the 15 year mortgage payment, we highly recommend paying less interest over the life of the mortgage loan.

Here is something else to think about when deciding.  This is an example of how much more you will pay down your mortgage balance when deciding on the 3o year mortgage versus the 15 year mortgage.

Example:
You have a $150,000 loan amount and the interest rate is 5.0% on a 30 year mortgage. 

The principal and interest payment is $805.23.  Of that $805.23 payment, only $180.23 goes toward the principal balance of your mortgage loan.

Now, compare the same loan amount and interest rate on a 15 year mortgage.  The principal and interest payment is $1186.19.  Of that $1186.19 payment, $561.19 goes towards the principal balance of your mortgage loan.

In a full amortization schedule, the amount of your payment that goes towards principal increases each month.  For the sake of simple numbers, let’s assume the same amount of principal goes towards your balance each and every month.  Using the example of $150,000, the difference in the principal is $380.96.  ($561.19 – $180.23 = $380.96)  If you took $380.96 over the next year, that would equal $4571.52.  Over 5 years, that would be a whopping $22,857.60!!  Yes, that is how much you would reduce your mortgage balance over the next 5 years, using the example above.

We always recommend a 15 year mortgage, for another reason that you will pay down your mortgage balance faster.  Also, you usually get a lower interest rate on the 15 year mortgage versus the 30 year mortgage, so you will be paying less interest over the life of the mortgage as well.