It is not rocket science to realize the difference between a 15 and 30 year mortgage: the payments on the 15 are calculated so that the loan will be paid off in 15 years. Since it is less time, the payments on a 15 year loan will be more than on a 30 year loan.

Of course, you will earn equity in your home a lot faster with a 15 year mortgage than with a 30 year, but only if you can afford the higher payments each month. After this loan is paid, you will have equity in the house and can redo the loan if you like.

The axiom most people consider is “Longer term mortgages lower payments, shorter term home loans increase wealth.” If you can afford the higher payments of a 15 year loan, should you automatically choose it? With a thirty year loan, you could pay off the loan earlier by raising payments when you want. You won’t get the same benefits as you would if you chose the shorter term in the beginning but you do pay your mortgage down more quickly to build equity. 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 havaing payments low when you need to and paying the whole thing when you want to, to build equity.

There are those, however, who feel that they can build up wealth in different ways. If you were given the choice of a $100,000 mortgage at 7% for 30 years or 6.75% for 15 years (the longer term is always at a higher rate since the bank is taking more of a chance on rates getting higher) you would have a choice of paying $665 or $885, respectively. You theoretically need to choose an alternative investment for the difference of $220. Keep in mind the equity building power of the shorter term mortgage. If you think you can do better putting these funds in the stock market, or another investment such as a child’s college fund, you may build wealth as well. Judgment and needs are different.

But the 30 year loan has flexibility over a 15 year mortgage. If you are disciplined enough to put the funds that are saved into a different investment vehicle that fits better in your portfolio or your time of life, it may be the right choice. However, if you have little discipline, and the savings will just be squandered, you should take the 15 year option and concentrate on building wealth.

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