The difference between a 15 and 30 year home loan is fairly simple- you pay a 15 year loan off faster. Since it is less time, the payments on a 15 year loan will be higher than on a 30 year loan.
But the 15 year mortgage builds equity in the house a lot more quickly than the 30 year loan, with the consequence that the monthly payments are higher. Each time you pay off the 15 year home loan, you can get a new home loan since the equity stays in the home.
The axiom most people think about is "Longer term home loans reduce payments, shorter term home loans build wealth." What if there is no question about being able to afford the higher mortgage, should you automatically choose the 15 year mortgage? Of course, you can always make additional payments on the home loan to reduce the principal. You won't get the same benefits as you would if you chose the shorter term up front but you do pay your loan down more quickly to build wealth. If you can afford the higher payments, but choose the lower payment 30 year option you have the benefit of keeping payments low when you need to and paying down more when you want to build wealth.
There are others who feel they would rather have lower loan payments and build wealth through other investments. If you were given the options 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 moving up) you would have a choice of paying $665 or $885, respectively. What will you do with that $220 in additional savings? However, the equity built is a lot lower $5,868 for the 30 year loan vs. $22,933 for the 15 year mortgage. If you think you can do better putting this money in the stock market, or another investment such as a child's college fund, you may build wealth as well. Judgment and needs can vary.
The bottom line is that the 30 year home loan proves to be much more flexible than the 15 year term. If you are disciplined enough to put the funds that are saved into another investment vehicle that fits better 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 funds would be wasted; these kinds of people are better off being forced to build equity by the use of a shorter term loan. - 31387
But the 15 year mortgage builds equity in the house a lot more quickly than the 30 year loan, with the consequence that the monthly payments are higher. Each time you pay off the 15 year home loan, you can get a new home loan since the equity stays in the home.
The axiom most people think about is "Longer term home loans reduce payments, shorter term home loans build wealth." What if there is no question about being able to afford the higher mortgage, should you automatically choose the 15 year mortgage? Of course, you can always make additional payments on the home loan to reduce the principal. You won't get the same benefits as you would if you chose the shorter term up front but you do pay your loan down more quickly to build wealth. If you can afford the higher payments, but choose the lower payment 30 year option you have the benefit of keeping payments low when you need to and paying down more when you want to build wealth.
There are others who feel they would rather have lower loan payments and build wealth through other investments. If you were given the options 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 moving up) you would have a choice of paying $665 or $885, respectively. What will you do with that $220 in additional savings? However, the equity built is a lot lower $5,868 for the 30 year loan vs. $22,933 for the 15 year mortgage. If you think you can do better putting this money in the stock market, or another investment such as a child's college fund, you may build wealth as well. Judgment and needs can vary.
The bottom line is that the 30 year home loan proves to be much more flexible than the 15 year term. If you are disciplined enough to put the funds that are saved into another investment vehicle that fits better 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 funds would be wasted; these kinds of people are better off being forced to build equity by the use of a shorter term loan. - 31387
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