When you take out a mortgage loan to buy a home, you have a lot of choices to make. One of those choices has to do with the length of the term.
For decades, the 30-year fixed-rate mortgage loan has been the most popular option among home buyers in the U.S. But the 15-year fixed mortgage runs a close second.
The question is, which option is right for you?
Summary: This guide explains how the 15-year fixed-rate mortgage loan works, the potential pros and cons, and how to decide if it’s right for you.
What Is a 15-year Mortgage, Exactly?
As its name suggests, a 15-year fixed-rate mortgage is a home loan with a repayment window (or “term”) of 15 years. The debt is amortized and spread out over a 15-year period, after which the loan is paid in full.
Of course, many homeowners who use these loans end up refinancing or selling the home before the full term has expired. That’s always an option.
But when you take out a 15-year mortgage loan to buy a house, you are agreeing to a repayment term for that specific length of time.
Key point: These loans have a “fixed” interest rate. This means that the rate won’t change for as long as the borrower keeps the loan, even for the full 15-year term.
This is an important distinction, because some home loans have an adjustable rate that can change over time. These are known as adjustable-rate mortgages, or ARMs.
But the 15-year fixed mortgage will carry the same interest rate for the entire repayment period.
How a 15-Year Home Loan Works
As you probably already know, a mortgage loan is a type of loan used to buy a house. Home buyers who cannot afford to pay cash for a property usually end up borrowing money from a lender.
The lender provides the borrower with a sum of money, which the borrower then uses to buy the home. In return, the borrower agrees to repay the loan (plus interest) over a specified period of time, in this case over 15 years.
Here’s how the mortgage lending process works with a 15-year fixed-rate mortgage:
- Pre-approval: The borrower applies for pre-approval with a lender, submitting financial details like income, debts, and credit score.
- Home search: The borrower finds a home within their budget and makes an offer to purchase it.
- Purchase agreement: Once the offer is accepted, the borrower and seller sign a purchase agreement that outlines the terms of the sale.
- Appraisal: The lender orders an appraisal to ensure that the home’s value matches or exceeds the loan amount.
- Underwriting: The lender reviews the borrower’s financials and the appraisal report to determine if the loan meets all applicable requirements.
- Loan approval: If the borrower meets all conditions, the lender approves the loan.
- Closing: The borrower signs final paperwork, pays closing costs, and the lender funds the loan. Ownership transfers to the borrower.
- 15-year repayment: The borrower makes fixed monthly payments for 15 years, with the same interest rate throughout the term. The loan is paid off at the end of the 15 years.
It’s worth repeating: Some home buyers who use a 15-year fixed mortgage end up selling the home or refinancing the loan before reaching the end of that timeframe. So you’re not necessarily “locked” into the home for the full 15-year term.
Understanding the Pros and Cons
The 30-year fixed-rate mortgage is by far the most popular financing product in use today. It accounts for the vast majority of home loans that are originated in the United States.
But there are situations where a 15-year mortgage loan might be a better option for a borrower. The key to choosing the right loan is to understand the pros and cons associated with it.
One of the primary advantages of using a 15-year mortgage (versus a 30-year product) is that you pay less interest over the long term. That’s because you are keeping the loan for a shorter period of time, and making fewer payments.
Interest is applied to every one of your monthly mortgage payments. This is true whether you’re using a 15- or 30-year loan. So the longer you keep the loan (and the more payments you make) the more you’ll end up paying in total interest.
Additionally, 15-year mortgages usually have lower interest rates than their longer-term 30-year counterparts. So a borrower who opts for the shorter term might pay less interest for a shorter period of time. This can add up to significant savings over the long term.
The primary disadvantage to using the 15-year option is that you could end up with a higher monthly mortgage payment, when compared to a 30-year fixed home loan. That’s because you’re cutting the repayment period in half.
These are important points, so let’s break it down one more time:
Pros of a 15-Year Mortgage
- Lower total interest paid. You pay significantly less in interest over the life of the loan due to the shorter term and often lower interest rate.
- Faster equity build-up. You build equity in your home much faster because you are paying off the loan at a quicker pace.
- Potential for financial freedom. Paying off your mortgage sooner can free up more of your monthly cash flow.
Cons of a 15-Year Mortgage
- Higher monthly payments. Due to the shorter loan term, your monthly payments will be substantially higher.
- May not be accessible for all budgets. If your income is limited, the higher monthly payments of a 15-year mortgage may not be feasible.
A Real-World Comparison Between These Loans
When this article was published in fall 2024, the average rate for a 30-year fixed home loan was 6.44%. The average rate for a 15-year mortgage was 5.63%.
Using a mortgage calculator, let’s look at how this rate difference would affect the borrowers’ long-term costs. Let’s assume two borrowers are taking out home loans in the amount of $380,000.
- Borrower ‘A’ is using a 30-year fixed mortgage with an interest rate of 6.44%.
- Borrower ‘B’ is using a 15-year loan with an interest rate of 5.63%.
Let’s further assume that both of these homeowners actually stay in their homes and fulfill the entire repayment term. Here’s how their monthly payments and long-term costs would vary:
- Borrower ‘A’ (30-year fixed mortgage) would have a monthly payment of $2,716, and would end up paying $479,278 in total interest over the 30-year period. The total cost of the loan over 30 years, including principal and interest, would come to $859,278.
- Borrower ‘B’ (15-year mortgage loan) would have a monthly payment of $3,460, and would end up paying $183,615 in interest over the 15-year repayment term. The total cost of the loan in this scenario would come to $563,615 after 15 years.
This real-world scenario highlights the pros and cons of the 15-year fixed mortgage loan. Borrower ‘B’ had a higher monthly mortgage payment due to the shorter term. That’s the downside. But she also paid a lot less in total interest over the long term, and that’s the upside.
Borrower ‘A’ (who used a 30-year mortgage loan) ended up paying significantly more in total interest over the life of the loan. That’s because the 30-year option came with a higher interest rate from day one, and the homeowner paid that higher rate over a longer period of time.
Conclusion: Which One Is Right for You?
This article gives you a basic idea of how a 15-year fixed home loan works, and when it might make sense to use one. The key here is to consider the pros and cons in light of your specific financing goals.
- If your primary goal is to reduce the size of your monthly payments, then you’re probably better off with a 30-year home loan.
- If you can afford a larger monthly payment, and you want to reduce the amount of interest paid over the long term, then the 15-year mortgage loan might be a better option for you.
When applying for a loan, have your lender explain how your payments will work out over time — including the total amount of interest. Better yet, have them present you with multiple options, so you can see which one works best for you.
Disclaimer: Every lending scenario is different, because every borrower is different. So your situation might differ from the examples presented above.