Is a 15 or 30-Year Mortgage Better?

I hear quite often that a 15 year mortgage is better than a 30 year mortgage. And it stems from the simple idea that if you pay on a loan for 15 years compared to a 30 years, then you're paying less interest. That statement is true, but there's more to the equation than simply looking at the interest paid. Let's take an example of $100,000 loan at 4%. Over 30 years, your payment would be $477 a month. And over that 30 year period, you would pay $71,869 in interest. A 15 year mortgage using the same hundred thousand dollar loan amount at 4%, your payment would be $740 a month. And over that 15 years, you would have paid $333,143 in interest. That is a difference of $38,726. So on the surface the idea of doing a 15 year mortgage seems so obvious. But this is example of getting a half truth. What does the other half of the story reveal? The difference is in the fact that you're paying $263 more dollars each month. If you take this amount times 12 months over the 15 years, you would have paid an extra $47,340 to save the $33,143 in interest. So if under the 30 year mortgage scenario, you use the same cash outlay and paid the bank mortgage payment of $477 a month and saved the 263amonth at a 4% rate, you would have accumulated $65,722 in cash. Now, a 30 year mortgage in 15 years will still have a balance of $64,542. So that puts you on top by $1,180. If you paid the 263amonth for the entire 30 year period, you would have paid all the interest to the mortgage company plus have $184,000. Compare this to a 15 year mortgage where you have a payment of 740amonth over 15 years. Then after the mortgage is paid off, you take the 740amonth and save that amount for 15 years. Using the same 4% example, in 15 years you you would have the exact same amount of money saved, $184,000. So if you were essentially in the same financial position either way, why is there such a debate about the two terms? Who actually benefits? The real winner in a 15 year scenario is the bank and the IRS. Because the bank is taking more of your money. Out of your control and the IRS is getting more tax dollars from you. You see, with a 15 year mortgage you're making a higher payment which is a win for the bank and you have less interest to deduct, which is a win for the IRS. And with a 30 year mortgage, you have a lower payment which puts more money in your control. And since you are paying more interest, you have more interest to deduct for tax purposes. $38,726 to be exact. And in a 25% tax bracket, that is a tax savings of $9,681 more than the 15 year mortgage. Everything we do with money is about cash flow. And when you pay extra towards a mortgage or opt for a 15 year mortgage, you're voluntarily giving up control of your cash flow to the bank. This prevents you from having money available when opportunities or needs arise. I hear from people all the time who find themselves stuck in a 15 year mortgage and having to borrow more money from banks to make vehicle purchases or pay for their child's education. It's a cycle of continuously relying on banks to fund your lifestyle. One last point with the topic of mortgages. If you have a monthly payment of 477amonth over 30 years, inflation will impact the payment over time. A $477 payment today would be equivalent to $362 in 10 years, $311 in 15 years, $267 in 20 years, $197 in 30 years. So the longer the duration of the loan, the more inflation helps helps offset the effects it has on your actual financial situation, allowing more wealth to be created.

Sam.