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Saturday, October 17, 2009

Should You Choose a 15 or 30 Year Mortgage?

By Sandy R. Mossin

The difference between a 15 and 30 year home loan is fairly simple- you pay a 15 year mortgage off faster. Since it is less time, the payments on a 15 year mortgage 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 balance off in a shorter time. Each time you pay off the 15 year mortgage, you can get a new home loan since the equity remains in the home.

It depends on your needs; some people would rather have a shorter loan to build equity in their home more quickly, some want to keep monthly payments low. What if there is no question about being able to afford the higher mortgage, should you automatically choose the 15 year loan? Of course, you can always make higher payments on the home loan to lower the term. Even though this will not be as fast as a regular 15 year loan, you will lower your loan balance more quickly. In this case, choosing the 30 year option even if you can afford the higher payments of the 15 year option gives you the flexibility of keeping payments low when you need to and paying the whole thing when desired, to build equity.

There are others who feel they would rather have lower loan payments and build wealth through other means. Here is a example: with a $100,000 mortgage, you could pick between a 30 year mortgage at 7% or a 15 year loan at 6.75% (longer terms usually have higher rates since the lender is risking its funds more) with respective monthly payments of $665 and $885. You theoretically have to pick an alternative investment for the difference of $220. However, the equity built is a lot different $5,868 for the 30 year loan vs. $22,933 for the 15 year loan. 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 consider an investment in a 529 plan more valuable. Judgment and needs can vary.

But the 30 year mortgage has flexibility over a 15 year mortgage. Those people who have the discipline to invest or save the $220 saved on the mortgage, would probably do perfectly fine. But for those with little discipline to put the money away, the money will be wasted and they should have stuck with the 15 year mortgage and built wealth automatically. - 23211

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