15- Vs. 30-Year Mortgage Tax Savings

Both 15-year and 30-year fixed-rate mortgage loans bring yearly tax savings.

Both 15-year and 30-year fixed-rate mortgage loans bring yearly tax savings.

It's not always easy to choose between a 15-year fixed-rate mortgage loan and a 30-year fixed-rate loan. A 30-year mortgage loan comes with lower monthly payments, but if you take out a 15-year loan you'll pay less interest over the life of the loan. With either a 15-year or a 30-year mortgage, you'll be able to deduct the interest when preparing your income tax return.

Mortgage-Interest Deduction

Homeowners who are paying off a mortgage loan receive a significant tax benefit each year: They can deduct the total amount of interest they've paid on the loan when they file their income tax returns. According to research from the National Association of Home Builders, a family with a total income of $80,000 and a $180,000 mortgage loan with an interest rate of 5.5 percent would save $7,050 in taxes during the first five years of a mortgage loan.

15-Year, 30-Year Tax Savings

Do homeowners receive more tax savings on a 30-year mortgage loan or a 15-year mortgage loan? The surprising answer: It doesn't matter. Yes, homeowners who are paying off a 30-year mortgage loan will receive bigger interest deductions each year because they are paying more in interest each month. Paying more interest throughout the year makes them eligible for a larger deduction come tax time. Homeowners with a 15-year mortgage loan, however, pay less interest throughout the year. It makes sense, then, that this homeowner would receive a smaller interest deduction during the year.

Length of Payments

Homeowners might think that a 30-year mortgage loan provides greater tax savings because the loan lasts twice as long. Again, though, any tax savings are largely illusory. Homeowners will receive more interest deductions during the life of a 30-year fixed-rate loan, but only because they are paying so much more interest over the life of the loan. A recent analysis by MSN Money found that homeowners paying off a $200,000, 30-year, fixed-rate loan with an interest rate of 3.375 percent would pay $118,309 in interest over the life of the loan. The homeowner paying off a 15-year, fixed-rate loan with an interest rate of 2.75 percent would pay just $44,303 in interest over the life of the loan.

Other Considerations

Taxes, then, should not be the only factor you consider when debating the merits of 15-year and 30-year fixed-rate mortgages. The main benefit of a 30-year mortgage is the lower monthly payment. Because your payments are spread out over more years, each individual payment is smaller. Homeowners choose 15-year mortgage loans because they pay less in interest over the life of the loan and, because of the shorter terms, they build up equity faster. You should consider all of these factors when deciding which loan type is best for you.

About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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