15 or 30 Year Terms

After you've decided which type of mortgage -- fixed or adjustable -- you also need to make another important choice -- typically between a 15-year and a 30-year mortgage.

• The main advantage that a 30-year mortgage has over its 15-year peer is that it has lower monthly payments that free up more of your monthly income for other purposes. A 30-year mortgage has lower monthly payments because you have a longer time period to repay it (which translates into more payments). A fixed-rate 30-year mortgage with an interest rate of 7 percent, for example, has payments that are approximately 25 percent lower than those on a comparable 15-year mortgage.
• What if you can afford the higher payments that a 15-year mortgage requires? Should you take it? Not necessarily. What if, instead of making large payments on the 15-year mortgage, you make smaller payments on a 30-year mortgage and put that extra money to productive use?
• A terrific potential use for that extra money is to contribute it to a tax-deductible retirement account that you have access to. Contributions that you add to employer-based 401(k) not only give you an immediate reduction in taxes but also enable your investment to compound, tax-deferred, over the years ahead.
• If you have exhausted your options for contributing to all the retirement accounts that you can, and if you find it challenging to save money anyway, the 15-year mortgage may offer you a good forced-savings program.
• When you elect to take a 30-year mortgage, you retain the flexibility to pay it off faster if you so choose. Just be sure to avoid those mortgages that have a prepayment penalty. Constraining yourself with the 15-year mortgage's higher monthly payments does carry a risk. Should you fall on tough financial times, you may not be able to meet the required mortgage payments.

Not all mortgages come in just 15 and 30-year varieties. You may run across some 20 and 40-year versions, but that won't change the issues.