by James Garton

Created on: June 14, 2010

The controversy of which fixed rate mortgage term is the best, 15 or 30 years, has been debated for years. Under a 30 year loan, the homeowner can spread the interest and principal over twice length of time. Stretching out the term allows a home buyer to obtain a larger property or just keep a lower monthly rate compared to the 15 year.

The advantage of the 15 year mortgage is a homeowner will payoff the loan much quicker. More of the monthly payments pays off the principal balance, and less to the interest. This allows a homeowner to rapidly build equity.

Under the time value of money principal, the longer a lender has to wait to get paid back, the higher the interest rate. This is why a 15 year mortgage will generally have a lower interest rate compared to the 30 year mortgage. With the lower rate, the 15 year mortgage offers a significant financial gain. The homeowner can rapidly pay down his home at a faster pace compared to the 30 year mortgage holder.

Anyone who is on a tight budget and needs a little wiggle room for unexpected expenses, should absolutely go with a 30 year mortgage. If a home buyer has very little savings, a 15 year mortgage could easily become a burden.

One emergency or unexpected expense could wipe out what little savings you may have, and require you to tap into your paycheck. A situation like this can get ugly very quickly, as you rob Peter to pay Paul.

How Do You Spend Your Money?

Before you decide on which term your going with, you should closely examine your monthly spending habits. If you have additional debts, and the lower monthly payment can help free up money to get you debt free, a 30 year term may be your best bet.

On the other hand, if you have very little debt besides the mortgage, and are not saving or investing your money, then a 15 year term may be best for you. At least you will have a forced savings in the form of home equity. This is a much better scenario compared to just blowing your money on useless stuff.

Don't Let The Lender Pressure You

Some mortgage brokers get higher commission for pushing a home buyer into a particular mortgage term. Don't fall victim to pressure, just think rational and always consider your budget.

The best way to make an informed decision is to shop rates, and speak to several professionals. Your real estate agent, accountant, and mortgage broker can all be helpful. A trusted friend or relative can also be of service, as they share their experiences. However, what is best for you is not what other suggest, but what you can afford.

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