It is not complicated to understand that the difference between a 15 and 30 year home loan is that the payments on the fifteen year loan are designed to pay the loan off faster. Since it is a shorter period, the payments on a 15 year loan will be more than on a 30 year loan.
By the same token, you will create equity in your home a lot faster with the shorter term mortgage, but of course you have to pay more to do this. After this mortgage is paid, you will have equity in the house and can redo the loan if you like.
It depends on your needs; some people would rather have a shorter loan to build equity in their home faster, some want to keep monthly payments down. What if there is no question about affording the higher mortgage, should you automatically choose the 15 year loan? With a thirty year loan, you could pay off the loan earlier by raising payments when you could. You won’t get the same advantage as you would by choosing the 15 year mortgage to begin with, but you will build equity by higher 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 prefer to.
There are others who feel they would rather have lower mortgage payments and build wealth through other means. 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. The savings of $220 can be put to use in many ways. Keep in mind the equity building power of the shorter term mortgage. Someone who is good 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.
But the 30 year mortgage has flexibility over a 15 year mortgage. 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. Too many people, however, do not possess 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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