Ask the Expert: 30 yr or 15 yr mortgage

We are trying to decide between a 30-year mortgage and a 15 year mortgage. The interest rate is a bit lower on the 15-year but the payments are nearly twice as high. What is the value to us of going with the 15-year?

The first obvious answer is that you pay off the mortgage more quickly. But, if you can afford payments on the 15-year mortgage, there is one big advantage: Equity.

According to mtgprofessor.com, the difference is dramatic.

Suppose you want to finance a $100,000 home for 30 years. At an interest rate of 4.25 percent, you’ll have an affordable payment of $492. If you take a 15-year mortgage at 3.375 percent, the payment is 44 percent higher at $709 per month.

The big difference in the deal comes over time. In five years, the amount  you owe on a 15-year mortgage is reduced by $27,900. During the same period, a 30-year mortgage sees a reduction of just $9,192.

According to mtgprofessor.com, the home equity growth on the 15-year is three times as large. As a practical matter, this means your debt load is lower and your flexibility is higher.

The equity in your home can be useful if you want to buy a bigger home — you’ll have more buying power.

More equity is also a boon in retirement. You can use your equity with a reverse mortgage to help fund retirement.

Finally, you could borrow against your equity by taking a home equity loan (second mortgage). This type of borrowing against equity can be used for home improvements or to fund education. Best advice, however, is to avoid this type of loan except if absolutely necessary since it defeats the purpose of building equity in the first place.