You may think that choosing the 15-year mortgage is the best financial move, and that may be correct for your situation but it is not true for all home buyers.  The main advantage to the shorter mortgage term is a savings on interest payments…the shorter the length of the loan, the less interest you pay.  However, there are advantages to the 30-year option too, the major advantage being greater cash flow in your month-to-month budget.  So, how do you know which is right for you?

Let’s start with what the mortgage terms actually mean to your wallet.  The main difference between the 15- and 30-year mortgage is how payments and interest are calculated.  The 15-year mortgage ultimately provides you with a higher overall payment, but you pay less interest to the lender.  With the 30-year option, the opposite occurs in most cases.  Another consideration is the actual mortgage rate:  shorter mortgage terms usually (but not always) have slightly lower interest rates. 

15-year mortgages may be the better option for those who:

  •          Have stable careers
  •          Have income which does not vary greatly

30-year mortgages may be the better option for those who:

  •          Have varying income
  •          Need to save for retirement
  •          Require more cash flow in their monthly budgets
  •          Like tax benefits, as interest deductions can be claimed over a longer period of time

Also don’t forget that most financial institutions do not penalize for “paying down” the loan faster.  If you can sock an extra $50/month into your principal payment, you can pay the loan off much faster than its original term.

The take away message:  while each term has its own pros and cons, it is in your best interest to consider your personal financial situation and discuss it with your lender before deciding.  The ultimate decision should rest on your peace of mind!