Weighing the Advantages of a 15 or 30 Year Mortgage

Written By: Sandy R. Mossin on October 16, 2009 No Comment

The simple difference between a 15 year or 30 year mortgage is that the 15 year mortgage payments are calculated to be paid down after 15 years instead of 30. Since it is less time, the payments on a 15 year loan will be more than on a 30 year mortgage.

But the 15 year mortgage builds equity in the home a lot more quickly than the 30 year loan, with the consequence that the monthly payments are higher. Of course, after the 15 year term has ended (or less if you move or refinance in the interim), you have to obtain a new home loan and decide once again which is better.

Depending on their needs; some people would rather have a shorter mortgage to build equity in their home more quickly, some want to keep mortgage payments down. What if there is no question about affording the higher payments, should you automatically choose the 15 year mortgage? With a thirty year loan, you could pay down the mortgage earlier by raising payments when you want. Even though this will not be as fast as a regular 15 year loan, you will reduce your loan balance more quickly. If you can afford the higher payments, but prefer the lower payment 30 year option you have the advantage of keeping payments low when you need to and paying down more when you want to build wealth.

Of course, there are a lot of people who believe they can build wealth in other ways. For example, if you are offered a 30 year home loan at 7% for $100,000 ($665 per month) but the rate on a 15 year home loan is 6.75%, since the longer mortgage will have a higher risk premium ($885 per month). What can you do with that $220 in additional savings? Keep in mind the equity building power of the shorter term loan. What would happen if you invested $220 in the stock market each month, using dollar averaging purchases or putting it into a Section 529 plan for your children’s’ education? You be the judge.

But the 30 year loan has flexibility over a 15 year loan. Those people who have the discipline to invest or save the $220 saved on the mortgage, would probably do perfectly fine. Too many people, however, do not have this kind of discipline, and the money would be wasted; these kinds of people are better off being forced to build equity through the use of a shorter term loan.

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