15-Year vs. 30-Year Mortgage: What’s Best?

Available for Interviews: Harry Abrahamsen

Harry J. Abrahamsen is Founder & CEO Abrahamsen Financial Group. His company offers customized wealth management solutions—creating plans and portfolios that protect, preserve, and grow client’s wealth. He was selected as one of the ten most dependable Wealth Managers in the Mid-Atlantic as published in Forbes magazine.

What Harry Abramhamsen can say in an interview on
When It Comes to Financing Your Home:

Whether you’re a first-time homebuyer or consider yourself a seasoned pro, there is a certain anxiety that comes with buying a home. While it’s evident that styles, neighborhoods, school systems, and property taxes are all critical aspects of the home-buying process, there is no single element more puzzling and stressful to the consumer than the decision of how to finance one’s home.

Banks and other financial institutions claim to make this often mystifying process “easy,” but with literally dozens of financing options –adjustable rate mortgages, terms of 15-year, 30-year, and 40-year, interest-only payment options, as well as varying down-payment sizes—all people are often left with trying to figure this all out and make the right decision.

You need to understand precisely how your money works to avoid being trapped by the bank’s claims of saving you money through fancy “quick payoff” options.

Understanding the Fundamentals

To figure out what the best financing option would be, try turning the clock back a little and dust off your old economics textbooks. Turn to the chapter on opportunity cost and take into account a little “gift” that the IRS gives us called an income tax deduction. After that, figuring out the best way to finance your new home becomes an easy decision!

The first, and perhaps most important step is to clearly understand what you can afford. Figure out property taxes, utilities, other home ownership bills, possible refurbishments, and don’t get in over your head. This is the simple part.

Generally speaking, the less money you can put down, the better. Just keep in mind that there is a minimum payment amount that will avoid certain fees (points, etc.) and it is usually advisable to make at least enough of a down payment to avoid these expenses. It’s important to understand that financial institutions make money by keeping our money. They want our money any way they can get it. The amount of money you put down will always determine the size of your loan and, thus, the size of your monthly payments. But the more money you hold onto increases the opportunity and flexibility you have to make the decisions that are best for you and your family. When interest rates are attractively low, your ability to outperform the loan’s net interest rate, by investing in something as simple and safe as guaranteed savings vehicles, may be an attractive alternative.

In most cases a 15-year mortgage is not cheaper.

To the contrary, most banks and other financial institutions heavily push the 15-year mortgage on the consumer. Those who can afford the higher monthly payment often eschew the 30-year and longer mortgages in the name of “interest savings.” You will often hear that a 15-year mortgage will save you considerable money versus a 30-year mortgage because you’ll pay significantly less interest. It’s true that the interest portion of a 15-year mortgage is less, but in most cases where a sound rate of return can be achieved, a 15-year mortgage is not cheaper. Here’s why. . . 

A critical component in calculating the cost, that many people fail to consider, is the tax-deductible portion of the mortgage in the comparative cost analysis. For example, when assessing the cost of a 15-year mortgage at 5.25% versus a 30-year mortgage at 5.75% on a $250,000 home, let’s suppose an individual is in a 28% marginal tax bracket and has a well-producing investment asset (such as a mutual fund) assumed to earn 8% over a thirty-year projection. Both mortgages require a repayment of $250,000 of principal over the term of the mortgage, but the 15-year mortgage has an interest cost of approximately $111,745 and monthly payments of $2,009.69, while the 30-year mortgage has interest costs of approximately $275,216 and monthly payments of $1,458.93. Most financial institutions stop there and show the consumer that the 15-year mortgage is far less expensive. But, they have not shown the entire story.

Since less interest is generated by a 15-year mortgage versus a 30- year mortgage, the amount of loan interest that is deductible on the individual’s tax return is also less. This means that the money that the government was willing to put back into the individual’s pocket, because of the interest deductions, will be significantly reduced. Further, in many cases where an individual’s earning potential increases with age, the tax rate also increases, meaning even more savings due to the interest deduction. Therefore, in order to properly assess the overall “cost” of a 15-year versus a 30-year mortgage, one must take into account the difference in the projected tax deductions and the investment of those tax savings. Assuming that the tax savings are invested into an equity product at 8%, the growth potential of the dollars saved can be significant.  

A second area to consider is the lower monthly payment amount of the 30-year mortgage. In this example the individual has an extra $550.76 per month, or approximately $6,609 per year to invest over the first 15 years. Not only does this money represent significant investment opportunity, but it can also function as a measure of safety and liquidity in instances where savings reserves may be less than ideal or in an emergency.

Another area to consider, and one that is rarely discussed, is the eroding factor of inflation. In periods of increasing inflation, a dollar today is worth more than a dollar tomorrow. So, in the case of a 15- year mortgage, more of today’s dollars, which are more valuable, are being paid to the mortgage company instead of remaining in the individual’s pocket. Depending on the rate of inflation, this factor can contribute significantly to reducing the gap between the present values of the 15-year and 30-year mortgages.

This is just one example of how the information you hear may not always be in your best interest.

In sum, when all of these factors are considered, the total cost for carrying the 15-year mortgage over a thirty-year time horizon can often be more than the 30-year mortgage. And even in cases of low rates of return and regardless of interest rates, tax brackets, annual income, etc., many people will still find a 30-year mortgage more economically beneficial due to – lower payments, more spendable dollars monthly, protection against loss of income due to a lower monthly payment, etc. While this is not universally the case, it is important to assess your own personal situation for yourself.

It is important to keep in mind that the information you hear may not always be in your best interest. A good way to decipher the best mortgage option for you and your family is to work with someone who will give you the information and tools to gather the facts necessary to make better informed economic decisions.


Interview: Harry Abrahamsen

Harry J. Abrahamsen is Founder & CEO Abrahamsen Financial Group. He has been quoted in numerous national publications, such as Forbes, On Wall Street, Financial Planning, Bottom Line Personal, Smart Money and cited in the Encyclopedia Britannica. An independent research firm has selected Harry James Abrahamsen as “The 10 Most Dependable Wealth Managers in the Mid-Atlantic” published in the Forbes December 2007 issue Investment Guide. Harry Abrahamsen has five children and resides in New Jersey.

Jo Allison
Managing Editor
Director of Public Relations
Success In Media, Inc.

Leave a Reply