Should You Choose a 15 or 30 Year Home Loan?
by Celia O. White
It is not difficult to understand that the difference between a 15 and 30 year mortgage is that the payments on the fifteen year mortgage are designed to pay the loan off more quickly. What that simply means is that you have to pay extra each month with a fifteen year loan than you would with a thirty year mortgage.
Of course, you will earn equity in your home a lot faster with a 15 year mortgage than with a 30 year, but that assumes you can afford the higher payments each month. Of course, after the 15 year term is over (or less if you move or refinance in the interim), you have to get a new mortgage and decide once again which is the best choice.
It is a question of individual needs and preferences; some would prefer to keep monthly payments as low as they can, some would like to build equity as fast as possible. If you can manage the higher payments of a 15 year mortgage, would you be right to automatically choose it, or do you want to retain the flexibility of lower payments, giving you the opportunity to do other things with the money? If you pick a 30 year mortgage, you always have the option to pay additional payments and lower the principal more quickly. Even though this will not be as fast as a regular 15 year mortgage, you will reduce your loan principle more quickly. 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 keeping 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 increase wealth in other ways. 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 pick an alternative investment for the difference of $220. However, the equity built is a lot lower $5,868 for the 30 year loan vs. $22,933 for the 15 year loan. 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 investment calgary mortgage brokers. Everyone’s needs are different.
Many people simply prefer the flexibility given by the 30 year loan as compared to the 15 year loan. Depending on your level of discipline, putting the difference into some other investment plan may be a good idea at your particular stage of life alberta mortgage rates. 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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