Why 15-year mortgages are worth a look

The 30-year fixed mortgage is the apple pie of home financing, with roughly 9 in 10 borrowers choosing the long-term option. But that doesn’t mean it’s your only or best choice. For many homeowners, a shorter 15-year loan offers considerable savings.

There are just two differences between 15- and 30-year mortgages: first, the length of the term, and second, because the lender’s risk with you lasts 15 years instead of 30, the interest rate. A rule of thumb is that 15-year rates run about 0.75 percent lower than their 30-year siblings.

For most borrowers, the choice comes down to affordability. A 30-year loan offers the lowest monthly payments, allowing the flexibility to buy a more expensive home than you could with a 15-year term, or leaving more money for competing priorities such as retirement or college.

But with a higher rate and a twice-as-long term, the 30-year mortgage will ultimately cost a great deal more than the 15-year option. Over 30 years, a $150,000 mortgage at 4 percent will cost about $258,000. Meanwhile, borrowing the same $150,000 for 15 years at 3.25 percent will cost just $190,000, saving you almost $70,000.

Of course, the benefit doesn’t come without its trade-off. The monthly payment for the 30-year loan will run about $716, while the 15-year mortgage will require committing to a $1,054 payment.

Still, if you can afford the higher payment and your income is reliable, the 15-year term will save a considerable sum, and get you debt-free sooner. Indeed, it’s a particularly great option for those approaching retirement.

Want the 15-year savings but leery of committing to higher payments? A hybrid is to take a 30-year loan but make payments at the 15-year level, still saving a substantial amount while retaining your option to make lower payments during lean times.