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Which is a Better Choice, a 15 or 30 Year Home Loan?
The simple difference between a 15 year or 30 year mortgage is that the 15 year mortgage payments are calculated to be paid down after 15 years instead of 30. Of course, the payments on the 15 year mortgage will consequently be higher than on the 30 year mortgage.
Of course, you will build equity in your house a lot faster with a 15 year mortgage than with a 30 year, but that assumes you can afford the higher payments every month. Once a 15 year mortgage is paid down, there is still plenty of equity in the house and a new mortgage can be negotiated.
The axiom most people think about is "Longer term home loans reduce payments, shorter term home loans increase wealth." If you can afford the higher payments of a 15 year mortgage, should you automatically opt for it? If you pick a 30 year mortgage, you certainly have the option of paying additional payments and reduce the principal more quickly. The benefits are not exactly the same as choosing the 15 year mortgage in the first place, but you will build equity faster than maintaining the minimum payments. 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 those, however, who feel that they can build up wealth in other ways. Let us say that the monthly mortgage 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. How would you use the savings of $220? With the 30 year mortgage, you would have only repaid $5,868 in principal, as opposed to $22,933 with the 15 year mortgage. There are people who believe putting the additional $220 into the stock market would yield a better return, or maybe an investment in a child's 529 education plan is a more important need. Each person's needs and expertise are different.
Many people simply prefer the flexibility offered by the 30 year loan as compared to the 15 year loan. If you are able to put the $220 away in a stock market plan or an education plan, this could be the wisest choice right now. But for those with little discipline to put those funds away, the money will be wasted and they should have stuck with the 15 year mortgage to build wealth automatically.
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