Don’t take any aspect of home finance lightly, especially if you are a first-time buyer.

Many people in the U.S. assume when buying a home that a 30-year mortgage loan is their only real choice, but you can save a lot of money by going with a 15-year loan if you can afford it.

Spreading the payments over 30 years of course makes loan payments more affordable, but you will pay so much more if you go this route. And if you think you can’t swing a 15-year loan, you should still learn about all available options. The potential savings might be so large that it’s worth considering “buying less house” or reducing your expenses another way to get it done.

Indeed, the 30-year fixed-rate mortgage loan wasn’t always the standard in the U.S. “Before the Great Depression, home mortgages were shorter-term loans, 15-year at the longest,” according to Whitney Fite, president of Angel Oak Home Loans, a retail mortgage lender based in Atlanta.

“After the Great Depression, in an effort to make homes more affordable, the government guaranteed loans to allow longer terms,” Fite added.

Fite emphasized the importance of having a lender consider a borrower’s entire financial picture. “Since we are a nonbank lender we have to be licensed, and we take on an advisory role,” Fite said. “Often times, we will have clients that have substantial debt, most often student loans. Sometimes it makes more sense to buy less house and take that money and pay down the student loans.”

Comparing loan terms

Let’s start by comparing a 30-year fixed-rate mortgage loan with a 15-year fixed-rate loan. We’re only looking at fixed-rate loans here, because interest rates are so low that it doesn’t really make sense to consider a variable-rate loan at this time.

The Mortgage Bankers Association estimates the median price for a new home sold in the U.S. this year will be $294,600, and that the median price for an existing home will be $224,500. So let’s begin with an example where a home is purchased for $260,000.

Most borrowers will have to come up with a 20% down payment to qualify for a loan. But your mortgage lender can help you to learn whether you qualify for a lower down payment through the Federal Housing Administration (FHA) or another government program.

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Fannie Mae FNMA, +2.51% and Freddie Mac FMCC, +1.84% , the government-sponsored mortgage giants that buy the great majority of newly originated residential loans in the U.S., have guidelines that also allow down payments of less than 20% for “conventional mortgage loans,” which have balances up to $417,000. But in return for the lower down payment, the borrower pays a monthly private mortgage insurance premium. The insurance protects the lender or investor, which won’t have the customary 20% cushion to protect its interest.

To keep things simple, we’ll use the 20% down payment for this example. Your down payment is $52,000, so you will borrow $208,000. You will also have to cover the costs associated with purchasing the home and taking out the loan. These closing costs typically range from 2% to 5% of the purchase price, according to Zillow. If you are a first-time home buyer, this can be a brutal surprise.

According to Bankrate.com, the average interest rate for a 30-year fixed mortgage loan is currently 3.66%, while the average rate for a 15-year fixed mortgage loan is 2.72%. These are extraordinarily low rates — possibly the lowest you will see in your lifetime. Of course, your personal situation may not make this an ideal time to lock in a low rate, but the numbers speak for themselves. You may also find, depending on your credit history, income relative to the loan amount, other debt and other factors, that rates offered to you will be considerably higher than these rates.

For simplicity, we’ll round the interest rates for our example to 3.65% for the 30-year loan and 2.70% for the 15-year loan.

30-year vs. 15-year loan

Based on our purchase price of $260,000, the 20% down payment of $52,000, loan amount of $208,000 and interest rate of 3.70%, the monthly principal and interest (P&I) payment for the 30-year loan is $957.39.

You might be ready to celebrate, but keep in mind this does not include any monthly escrow payment for insurance and taxes that will be required by the lender. Of course, you will also have the escrow payments with the 15-year loan, so we’re just comparing P&I here.

With an interest rate of 2.70%, the monthly P&I payment for the 15-year loan is $1,406.59.

Detailed comparison

Many people have a terrible habit when deciding on home or car purchases of only considering the affordability of monthly payments, rather than the entire cost for the life of a loan.

The total interest paid over the life of the 30-year loan will be $136,659. Total interest paid over the life of the 15-year loan will be just $45,186. So if you can afford the 15-year loan, you will save $91,473.

Common arguments in favor of the 30-year loan include the likelihood that you won’t stay in the home even for 15 years, and that its best to “buy the best house you can afford,” because then you will see a greater benefit from home-price appreciation over time. The mortgage credit crisis of 2008 and 2009 should be enough to prove that these are both weak arguments. You might not be able to sell your home if you are ready to move in just a few years, since its market value may have dropped significantly. You might even be “upside down,” with the market value being lower than the remaining loan balance.

Building equity faster

Fixed-rate mortgage loans have amortizing loan payments, which means the balance of the payment applied to principal and interest changes each month. Sounds boring? It’s critical to your understanding of why the 15-year loan has such huge advantages.

The first monthly payment of $957.39 for the 30-year loan is made up of $641.33 for interest and $316.06 for principal. After five years, the weighting of the payment is $578.38 for interest and $379.01 for principal. After 60 payments, you’re still building up equity very slowly. Your loan balance is $187,204.

You have built just $20,796 in equity over the five years, so including the down payment of $52,000, your total equity is $72,796, or 28% of the $260,000 purchase price.

Because the 15-year loan payment is so much more heavily weighted toward principal, in five years your situation will be a lot more favorable. The first monthly payment of $1,406.59 is made up of $468.00 in interest and $938.59 in principal. After five years, the weighting of the payment is $334.91 interest and $1,071.68 principal and your remaining loan balance is $147,778.

So after five years with the 15-year loan, you have built $60,222 in equity. Including the down payment of $52,000, your total equity is $112,222, or 43% of the purchase price of $260,000. That’s quite a bit of downside protection if you need to sell the house into a bad real estate market.

Another argument in favor of the 30-year loan

A common argument against making a commitment to higher payments for a 15-year loan is that you could simply reduce the balance of a 30-year loan more quickly by making periodic principal payments.

But even if you do that, you’re paying a much higher interest rate the entire time. And maintaining the discipline to make the principal paydowns might be very difficult. So many other things can get in the way, and your lower monthly payment might make you more likely to “buy too much car,” or otherwise hurt your overall financial situation.

The scenario above does not “work” in many U.S. markets, where home prices are so much higher. But the same principle applies. You can use a BankRate.com mortgage calculator to make your own comparisons of loan payments for 30-year and 15-year fixed-rate loans.

Consider the advantages of the 15-year loan. You can see the tremendous savings in the example above, and if homes cost more in your area, the savings will be even greater.

And if the 15-year loan doesn’t look right for you, other payment terms are available. According to Fite, you can easily get fixed-rate mortgage loans with 20-year or 25-year terms (or even 10-year terms) that Fannie and Freddie are willing to buy from lenders. A shorter term means a lower interest rate, faster equity build-up, and plenty of savings on interest as you get the debt monkey off your back much sooner.

When making your mortgage finance decision, be sure to think about your entire financial situation. Are you saving for retirement? Will you be able to do so if you buy your dream house? Maybe it would be better to look for balance in all aspects of your financial life, so you can afford a home, minimize interest payments, and save for retirement and college tuition for your children. Such careful purchasing and borrowing decisions can save you a lot of money — and pain.