It is not rocket science to understand the difference between a 15 and 30 year mortgage: the payments on the 15 are calculated so that the mortgage will be paid off in 15 years. Since it is less time, the payments on a 15 year loan will be higher than on a 30 year loan.
By the same idea, you will create equity in your house a lot faster with the shorter term mortgage, but of course you have to pay a higher monthly payment to do this. 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 better.
This is a personal decision, since some borrowers prefer to have lower monthly payments, and some like to build equity faster. What if there is no question about being able to afford the higher payments, should you automatically choose the 15 year mortgage? Of course, you can always make additional payments on the mortgage to reduce the term. Even though this will not be as fast as a regular 15 year mortgage, you will lower your loan balance more quickly. This is an good alternative to many people who want to maintain the flexibility of lower payments when they need them, or paying more when they want to.
There are others who feel they would rather have lower mortgage 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 getting higher) you would have a choice of paying $665 or $885, respectively. You theoretically have to choose 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. There are people who believe putting the saved $220 into the stock market would yield a better return, or perhaps an investment in a child’s 529 education plan is a more important need. Only you can judge.
But the 30 year loan has flexibility over a 15 year mortgage. Depending on your level of discipline, putting the difference into some other investment option may be a good idea at your particular stage of life. A lot of people, however, finding an extra $220 in their pocket will only waste it; those are the kind who should choose the automatic wealth building power of a shorter term mortgage.
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