It is not complicated to understand that the difference between a 15 and 30 year home loan is that the payments on the fifteen year mortgage are designed to pay the loan off more quickly. This, of course, means that you will have a higher monthly mortgage payment than with the 15 year than with the 30 year mortgage.

Of course, you will earn equity in your house a lot faster with a 15 year home loan 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 home and can redo the mortgage if you like.

The axiom most people consider is “Longer term mortgages lower payments, shorter term home loans increase wealth.” What if there is no question about being able to afford the higher mortgage, should you automatically opt for the 15 year loan? Of course, you can always make higher payments on the mortgage to reduce the principal. The advantages are not exactly the same as picking the 15 year home loan in the first place, but you will build equity faster than maintaining the required payments. This is an good alternative to many of those who like to maintain the flexibility of lower payments when they need them, or paying more when they can afford to.

There are those, however, who feel that they can build their wealth in other ways. If you were given the options 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 lender is taking more of a chance on rates moving up) you would have a choice of paying $665 or $885, respectively. The savings of $220 can be used in many ways. Keep in mind the equity building power of the shorter term loan. Someone who is good at investing in the stock market may believe they could put the funds to better use, or perhaps someone with children would consider an investment in a 529 plan more valuable. Judgment and needs are different.

Perhaps more important to a lot of people is the flexibility seen in the 30 year loan compared to to the 15 year mortgage. Those people who have the discipline to invest or save the $220 saved on the mortgage, would probably do well. Too many people, however, do not possess this kind of discipline, and the money would be wasted; these kinds of people are better off being forced to build equity through the use of a shorter term loan.

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