15- vs. 20- vs. 30-year mortgage: Which is best?

When you apply for a mortgage, one of the things that you must choose is the loan’s term. The term of a loan is how long it will take to pay the loan off, assuming you follow the minimum payment schedule.

Mortgages come with 30-, 15-, and, less commonly, 20-year terms. In general, loans with shorter terms have lower interest rates, meaning you save money over the long run, but they also have higher monthly payments.

We’ll break down what you need to know about different loan terms and how to decide which is right for you.

15- vs. 20- vs. 30-year mortgages, at a glance

The term of a mortgage impacts more than just the length of time it takes to pay the loan back. Lenders will offer different interest rates based on the term you select, and that, plus the number of payments needed to pay back the loan, influences other aspects of the loan.

How do the loan terms differ?

The term of a loan directly affects the length of time it takes to pay it back, but that affects other parts of the loan. For example, if you choose a shorter term, you’ll have to make larger payments each month to pay the loan off than if you’d chosen a loan with a longer term.

Here’s what you need to know.

15-year mortgage

15-year mortgages are the shortest-term mortgage you’ll commonly find. A key feature of these loans is that they have lower interest rates. The shorter term reduces the risk the lender takes by offering the loan, which allows them to charge a lower rate.

The shorter term also leads to higher monthly payments. Though you’ll pay less interest overall, the principal balance of the loan is split among half the number of payments as compared to a 30-year mortgage. Because more of each payment goes toward principal, another perk of these loans is that you build equity more quickly.

A 15-year loan is usually better for people who have larger incomes and can handle higher payments. They can also be good for people who are aggressively paying off debt or who are nearing retirement and want to own their home free and clear before they retire.

20-year mortgage

A 20-year mortgage can serve as a middle ground between 15- and 30-year loans. They have slightly lower rates than 30-year loans, but higher rates than 15-year loans. Similarly, the payments are lower than a 15-year loan but higher than a 30-year loan.

And 20-year mortgages are somewhat uncommon. Many lenders will offer a 30-year mortgage or a 15-year mortgage, but don’t offer 20-year loans. They are also all but impossible to find if you want to opt for an adjustable-rate mortgage.

These loans can be a good choice for people who can’t quite handle the higher payments of a 15-year mortgage but who want to get a loan with a lower rate or who hope to build equity quickly.

30-year mortgage

A 30-year mortgage is the standard home loan and what most people think of when they’re looking for mortgages. They offer the lower monthly payments and usually come with the more flexible when it comes to fees and terms because it’s easier for borrowers to shop around.

Those lower monthly payments can also make these loans easier to qualify for than shorter-term loans, especially if your income isn’t high. However, keep in mind that 30-year loans tend to have higher interest rates and leave more time for interest to accrue on your loan.

A 30-year mortgage is a good fit for someone who wants to have flexibility in their monthly budget to handle other financial needs, as well as for first-time home buyers.

Key components to compare when choosing a loan term

When selecting a mortgage, the loan term is just one thing to pay attention to. You also need to consider other aspects of the home loan.

Fixed vs. adjustable rates

The term of your mortgage has a big impact on the interest rate of your loan, but you also need to decide whether you want to get a fixed-rate or adjustable-rate mortgage (ARM).

Fixed-rate loans have an interest rate that does not change during the term of the loan. That means your monthly principal and interest payment won’t change. ARMs, on the other hand, have an interest rate that is set for a period, then can adjust after that.

For example, a 5/1 ARM has a rate that is fixed for the first 5 years, then changes once per year after that.

ARMs usually have lower initial rates than fixed-rate loans, but if rates rise, your payment will too. A big increase in rates could make your home loan unaffordable.

ARMs are usually best for people who plan to move or refinance a few years after buying the home.

Government-backed vs. conventional mortgage

Before you apply for a mortgage, you need to decide what loan program you will use.

Conventional loans are available to everyone, but they have rules about minimum credit score requirements, maximum loan amounts, maximum debt-to-income ratios, and the like.

There are also government-sponsored loan programs that may only be available to certain groups, but that can be easier to qualify for than conventional loans.

These are some popular government loan programs.

• FHA loan. FHA loans are aimed at borrowers who have limited funds for a down payment or who may struggle to get a conventional loan due to low credit scores. While qualifying can be easier, you’ll need to pay for mortgage insurance.
• VA loans.¹ VA loans are available to veterans, members of the military, and their spouses. There is no down payment requirement, and interest rates for VA loans can sometimes be lower than for conventional loans.
• USDA loans. You can use a USDA loan to buy a home in a designated rural area. Qualifying may be easier than for a conventional loan, and there is no down payment requirement.

Example of what this looks like in practice

The term of your mortgage impacts your loan’s interest rate. Differing rates, along with differing numbers of payments, mean that the loan’s term plays a big role in both the monthly and overall cost of a mortgage. In general, loans with shorter terms have higher monthly payments but lower interest rates.

Consider this scenario:

Hakeem is looking to purchase a condo. He decides to apply for an FHA loan. The condo costs $310,000, and Hakeem can make a down payment of 4% or $12,400.

That means Hakeem needs to borrow $297,600 to buy the condo. His lender offers loans with a term of 15-, 20-, or 30-years. Here’s how his choice of term would impact the interest rate, the monthly payment, and the total cost of the loan.

What to consider when selecting a mortgage term

When you’re choosing the term for your mortgage, it’s important to consider both your financial situation and your expectations for the mortgage market in the future.

Your current income

The term of your home loan has a huge impact on the monthly payment of your mortgage. If your income can’t support a high monthly payment, you’ll have to select a longer-term loan.

The Rocket Mortgage home affordability calculator can help you decide if you can afford the shorter-term loan.

Your long-term financial goals

Your long-term financial goals also play a part in choosing the right loan term.

For example, if you have student loans you want to pay off, you might choose a longer term, so you have more space in your monthly budget to make extra payments toward student debt. You could make the same decision if you want to prioritize saving for retirement.

On the other hand, if you have little debt and want owning your home mortgage-free to be a priority, a short-term loan is a good fit.

When you want to retire

Mortgages are a long commitment, so even if you’re not close to retirement, you should think about it when choosing a loan term. Some retirees opt to move to a smaller home as they age, and many face rising medical costs and reduced income.

A 15-year loan can help you be debt-free sooner, so you can live on a reduced income in retirement. It could also help you build equity that you can tap as you age.

Inflation and interest rates

When you get a mortgage, your loan rate is influenced by both personal factors and the wider market. Your predictions about future inflation and rate changes may influence your choice of term.

For example, if rates are very low, you may choose a long-term loan to lock in those low rates before they rise. On the other hand, you may choose a short-term loan if you think rates are high and may drop. You can always refinance² in the future to update the loan’s rate and term.

Other debt obligations

Your choice of mortgage term impacts your loan’s monthly payment, so you have to choose one you can afford. Other debts you have also impact how affordable a loan is, so if you have other debt, it can play a role in what loan term you choose.

Some debts to think about include:

• Car loans
• Student loans
• Medical debt
• Motorcycle loans
• RV loans
• Boat loans

You might opt for a longer-term loan to keep payments lower while you try to pay down other debts, then refinance to a short-term loan once you’ve paid off your student loan and can put more money toward your mortgage payment.

Some lenders may also only approve you for longer-term loans with lower monthly payments based on how much other debt you have. Eliminating other debts can reduce your debt-to-income ratio, making it easier to qualify for a short-term 15- or 20-year mortgage.

The bottom line: Thoroughly explore each mortgage term

When you apply for a mortgage, you can usually select the term of the loan. Mortgages come with 15-, 30-, and less commonly 20-year terms. While loans with shorter terms will save you money in the long run due to lower interest rates and leaving less time for interest to accrue, their higher monthly payments may make them harder to afford or qualify for.

If you’re ready to apply for a mortgage and need help selecting the right term, speak with a Rocket Mortgage Home Loan Expert who can help you make the best decision based on your financial goals.

¹ Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

² Refinancing may increase finance charges over the life of the loan.