It is not rocket science to realize the difference between a 15 and 30 year mortgage: the payments on the 15 are calculated so that the loan will be paid off in 15 years. Since it is a shorter period, the payments on a 15 year mortgage will be more than on a 30 year mortgage.
A 15 year loan will build equity in your home faster, because you will be paying the same balance off in a shorter time. 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 mortgage and decide once again which is the best choice.
Depending on their needs; some people prefer a shorter mortgage to build equity in their home faster, some want to keep mortgage payments low. If you can manage the higher payments of a 15 year loan, should you automatically opt for it? Remember that with a 30 year loan, you can pay it off more quickly by making higher than the required payments, or by paying twice each month. The benefits are not exactly the same as picking the 15 year home loan in the first place, but you will build equity faster than only paying the minimum payments. This is an option that appeals to a lot of people, since they feel that they can make higher payments when it is convenient, but keep the lower payments when they need to.
If you can afford the higher payments, however, you may think other investments may be a better option. Let us say that the monthly payment on a $100,000, 30 year mortgage at 7% is $665, but on a 15 year loan at 6.75% (the rate is always higher for the longer term) is $885. What can you do with that $220 in added savings? With the 30 year loan, you would have only repaid $5,868 in principal, as opposed to $22,933 with the 15 year loan. There are some who believe putting the saved $220 into some stocks would yield a better return, or perhaps an investment in a child’s 529 education plan is a more important investment. Only you can judge.
But the 30 year loan has flexibility over a 15 year mortgage. Those borrowers who have the discipline to invest or save the $220 savings, would probably do well. However, if you have no discipline, and the savings will just be wasted, you should use the 15 year option and concentrate on building wealth.
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