The difference between a 15 and 30 year mortgage is fairly simple- you pay a 15 year loan off faster. Of course, the payments on the 15 year loan will consequently be higher than on the 30 year loan.

But the 15 year loan builds equity in the home a lot more quickly than the 30 year loan, with the result that the monthly payments are higher. Once a 15 year home loan is paid off, there is still plenty of equity in the home and a new loan can be negotiated.

It depends on your needs; some people prefer a shorter mortgage to build equity in their home faster, some want to keep monthly payments down. If you can afford the higher payments of a 15 year mortgage, should you automatically choose it? If you pick a 30 year home loan, you always have the option to pay additional payments and reduce the principal more quickly. The benefits are not exactly the same as picking the 15 year mortgage in the first place, but you will build equity faster than maintaining the required payments. In this case, picking the 30 year option even if you can afford the higher mortgage payment of the 15 year option gives you the flexibility of havaing payments low when you need to and paying the whole thing when you want to, to build equity.

Of course, there are a lot of people who believe they can build wealth by other means. If you were given the choice 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 can you do with that $220 in additional savings? However, the equity built is a lot different $5,868 for the 30 year loan vs. $22,933 for the 15 year mortgage. There are some 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. Everyone’s needs are different.

The bottom line is that the 30 year mortgage proves to be much more flexible compared to the 15 year term. Depending on your level of discipline, investing the difference into some other investment plan may be a good idea at your particular stage of life. Many 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 loan.

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