The difference between a 15 and 30 year mortgage is fairly simple- you
pay a 15 year loan off faster. What that simply means is that you have
to pay extra each month with a fifteen year loan than you would with a
thirty year mortgage.
But the 15 year mortgage builds equity in the home a lot more quickly than the 30 year mortgage, with the consequence that the monthly payments are higher. After this mortgage is paid, you will have equity in the home and can redo the loan if you like.
It is a question of personal needs and preferences; some would prefer to keep mortgage payments as low as possible, some would like to build equity as quickly as possible. What if there is no question about being able to afford the higher payments, should you automatically choose the 15 year loan? With a thirty year loan, you could pay down the mortgage earlier by increasing payments when you could. Even though this will not be as fast as a straight 15 year loan, you will reduce your loan balance more quickly. This is an interesting alternative to many of those who want to keep the flexibility of lower payments at certain times, or paying more when they can afford to.
There are some, however, who feel that they can build up wealth in different ways. If you were given the choice of a $100,000 home loan at 7% for 30 years or 6.75% for 15 years (the longer term is always at a higher rate since the lender is taking more of a chance on rates getting higher) you would have a choice of paying $665 or $885, respectively. What will 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 mortgage. Someone who is adept at investing in the stock market may believe they could put the funds to better use, or perhaps someone with children would think an investment in a 529 plan more valuable. Only you can judge.
Many people simply prefer the flexibility given by the 30 year loan over the 15 year loan. If you are disciplined enough to put the funds that are saved into another investment vehicle that makes more sense in your portfolio or your time of life, it may be the way to go. However, if you have little discipline, and the savings will just be squandered, you should take the 15 year loan and concentrate on building wealth.
But the 15 year mortgage builds equity in the home a lot more quickly than the 30 year mortgage, with the consequence that the monthly payments are higher. After this mortgage is paid, you will have equity in the home and can redo the loan if you like.
It is a question of personal needs and preferences; some would prefer to keep mortgage payments as low as possible, some would like to build equity as quickly as possible. What if there is no question about being able to afford the higher payments, should you automatically choose the 15 year loan? With a thirty year loan, you could pay down the mortgage earlier by increasing payments when you could. Even though this will not be as fast as a straight 15 year loan, you will reduce your loan balance more quickly. This is an interesting alternative to many of those who want to keep the flexibility of lower payments at certain times, or paying more when they can afford to.
There are some, however, who feel that they can build up wealth in different ways. If you were given the choice of a $100,000 home loan at 7% for 30 years or 6.75% for 15 years (the longer term is always at a higher rate since the lender is taking more of a chance on rates getting higher) you would have a choice of paying $665 or $885, respectively. What will 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 mortgage. Someone who is adept at investing in the stock market may believe they could put the funds to better use, or perhaps someone with children would think an investment in a 529 plan more valuable. Only you can judge.
Many people simply prefer the flexibility given by the 30 year loan over the 15 year loan. If you are disciplined enough to put the funds that are saved into another investment vehicle that makes more sense in your portfolio or your time of life, it may be the way to go. However, if you have little discipline, and the savings will just be squandered, you should take the 15 year loan and concentrate on building wealth.
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