Wednesday, December 22, 2010

Deciding Between A 15 Or 30 Year Mortgage

It is not complicated to understand that the difference between a 15 and 30 year mortgage is that the payments on the fifteen year loan are designed to pay the loan off faster. Since it is less time, the payments on a 15 year loan will be more than on a 30 year loan.

A 15 year loan will build equity in your home more quickly, because you will be paying the same principle 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 get a new mortgage and decide once again which is the best choice.

It is a question of individual needs and preferences; some would prefer to keep mortgage payments as low as they can, some would like to build equity as quickly as possible. If it is not a question of what you can afford to pay; is the 15 year mortgage automatically a better idea, or could you do something different with the money? If you chose a 30 year home loan, you certainly have the option to pay additional payments and lower the principal more quickly. You won't get the same benefits as you would if you chose the shorter term in the beginning but you do pay your mortgage down more quickly to build wealth. This is an interesting alternative to many of those who like to maintain the flexibility of lower payments at certain times, or paying more when they can afford to.

If you can afford the higher mortgage, however, you may think other investments may be a better alternative. 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 mortgage is 6.75%, since the longer mortgage will have a bigger risk premium ($885 per month). You theoretically need to pick an alternative investment for the difference of $220. You can build equity with the shorter term mortgage, however. There are some who believe putting the additional $220 into some stocks would yield a better return, or perhaps an investment in a child's 529 education plan is a more important need. You be the 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 right choice. 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 by the use of a shorter term loan.

Tag : mortgage,mortgage calculator,mortgage rates,mortgage refinance