The 15-Year Mortgage Wins Until You Can Earn 8%
A 15-year loan saves $322,507 in interest but costs $802.68 more every month. Invest that difference instead and the answer flips, but only above a return most people do not reliably get. Here is the exact crossover point.
The case for a 15-year mortgage is usually made with one number: the interest saved. The case against it is usually made with a different number: the higher payment. Both are true, and quoting either one alone tells you almost nothing, because they are not measured over the same period of time.
Take a $400,000 loan. At the time of writing a 30-year fixed runs about 6.75% and a 15-year about 6.10%, since shorter terms price lower. The monthly payments are $2,594.39 and $3,397.08 respectively, a difference of $802.68.
| 30-year | 15-year | |
|---|---|---|
| Monthly principal and interest | $2,594.39 | $3,397.08 |
| Total interest | $533,981.26 | $211,473.66 |
| Total paid | $933,981.26 | $611,473.66 |
| Balance after 5 years | $375,502.84 | $304,606.71 |
The 15-year loan costs $322,507.60 less in interest. That is the number that sells 15-year mortgages, and taken by itself it is misleading, because the 30-year borrower has $802.68 a month that the 15-year borrower does not. What that money does over three decades is the entire argument.
The comparison almost nobody runs
To compare fairly, hold the monthly outlay constant and the time horizon constant. Give both borrowers exactly $3,397.08 a month for exactly 30 years.
- Borrower A takes the 15-year loan. For 180 months the entire $3,397.08 goes to the mortgage. From month 181 the house is paid off, and the full $3,397.08 goes into investments for the remaining 180 months.
- Borrower B takes the 30-year loan, pays $2,594.39 to the mortgage for all 360 months, and invests the $802.68 difference every month from the very first month.
Both spend the same amount each month. Both own the house outright at the end. The only question is who has the larger investment balance at month 360. At a 7% return, Borrower A finishes with $1,076,744.98 and Borrower B with $979,250.60. The 15-year loan wins by $97,494.38.
But that gap is highly sensitive to the return assumption, because Borrower B's money compounds for twice as long. Run the same comparison across a range of returns and the ranking flips:
| Return | A: 15-year then invest | B: 30-year, invest the difference | Winner |
|---|---|---|---|
| 4% | $835,988.07 | $557,102.01 | 15-year by $278,886.05 |
| 5% | $908,000.83 | $668,040.28 | 15-year by $239,960.55 |
| 6% | $987,933.24 | $806,307.66 | 15-year by $181,625.58 |
| 7% | $1,076,744.98 | $979,250.60 | 15-year by $97,494.38 |
| 8% | $1,175,518.10 | $1,196,286.95 | 30-year by $20,768.85 |
| 9% | $1,285,473.12 | $1,469,507.60 | 30-year by $184,034.49 |
| 10% | $1,407,987.22 | $1,814,456.38 | 30-year by $406,469.16 |
Why the crossover sits where it does
Paying down a mortgage is a risk-free, tax-free return equal to your interest rate. Prepaying a 6.75% loan earns you a guaranteed 6.75%. The 15-year borrower is effectively buying a large position in a 6.10% guaranteed bond, and the 30-year borrower is borrowing at 6.75% to invest in equities.
Framed that way the crossover being near 8% makes sense. You need an equity return meaningfully above the mortgage rate to justify the leverage, because the mortgage return is certain and the equity return is not. The 8% figure is a nominal, pre-tax, pre-fee number. Subtract a 0.5% fund fee and it becomes 8.5%. Hold the investments in a taxable account and it rises again.
The behavioural problem with Borrower B
Borrower B only wins if Borrower B genuinely invests $802.68 every single month for 360 consecutive months, starting immediately, and never touches it. The 15-year mortgage enforces the same discipline through a contract with a bank that will foreclose. The 30-year strategy relies on you.
This is not a small caveat. The most common real-world outcome is a third borrower who takes the 30-year loan for the flexibility, invests the difference for a while, and gradually stops. That borrower gets neither the guaranteed interest saving nor the compounding, and finishes well behind both.
When the 30-year is clearly right anyway
- You do not yet have an employer retirement match fully captured. A 50% match beats both options outright and should be funded before either.
- You carry any debt above about 8%. Clearing a 22% card balance dominates both mortgage strategies by a wide margin.
- Your emergency fund is not yet built. The 15-year payment consumes the cash flow that would otherwise build it, and a paid-down mortgage is not accessible when the roof fails.
- Your income is variable. The 30-year payment is a floor, not a ceiling. You can always send extra principal in good months and stop in bad ones, which is a genuine option the 15-year loan does not give you.
What actually decides it
Rank these in order and the answer usually appears without any further arithmetic. Can you comfortably afford the 15-year payment in a bad year, not just a good one? Have you already captured your match and cleared high-interest debt? Do you have a documented history of actually investing surplus cash rather than absorbing it into spending?
Three yes answers point to the 15-year loan, and the table above says you are giving up very little even if returns come in high. Any no answer points to the 30-year with optional extra principal, which is the more forgiving instrument and the reason it remains the default in the United States.
Compare both terms with your own rate and balanceMortgage CalculatorSee the full schedule for either termAmortization CalculatorTest extra principal on a 30-year loanMortgage Payoff CalculatorFrequently asked questions
Why is the 15-year interest rate lower than the 30-year?
The lender's exposure to interest-rate and default risk is shorter, so the loan is cheaper to fund. The spread is usually between 0.4 and 0.8 percentage points. That discount is a genuine part of the 15-year advantage, and it is why the comparison should always use two different rates rather than applying one rate to both terms, which overstates the 30-year's cost.
Does a 15-year mortgage help me qualify for a larger house?
The opposite. Lenders qualify you on the monthly payment relative to your income, so the higher 15-year payment reduces the loan amount you can be approved for, often by around 30%. If your goal is the largest affordable house, the 30-year term is the one that gets you there, which is precisely why it is worth checking whether that house is one you should be buying.
Can I get the 15-year result by paying extra on a 30-year loan?
Almost, but not exactly. You keep the flexibility, which has real value, but you pay the higher 30-year interest rate on every dollar for the whole time it is outstanding. On this $400,000 example you would need to pay roughly $800 extra each month to match the 15-year schedule, and you would still pay more total interest because your rate is 0.65 points higher. The flexibility is usually worth that premium.
Should I refinance from a 30-year into a 15-year?
Only if you can afford the new payment through a bad year and you are not giving up a materially lower existing rate. Someone holding a 3% pandemic-era 30-year mortgage should almost never refinance into a 15-year at current rates: the guaranteed return on prepaying 3% debt is poor, and that low rate is an asset. Someone holding a 7.5% loan from a rate peak is in a completely different position.
Does the mortgage interest deduction change the answer?
For most people, no, because they no longer itemise. The standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly, and the majority of borrowers do not clear it with mortgage interest and state taxes alone. If you do itemise, the deduction lowers your effective mortgage rate and shifts the crossover point down, favouring the 30-year loan somewhat. Run it with your actual marginal rate rather than assuming it applies.
Disclaimer: This article is educational and does not constitute financial, investment, tax, or legal advice. Figures are illustrative and computed from the assumptions stated in the article; your own situation will differ. Verify any decision with a qualified professional before acting on it.