The refinancing loan payment on a $100 thousand dollar thirty year mortgage at 7 percent is 665 USD as for a fifteen year mortgage at 6.75 percent its eight hundred and eighty-five dollars. A reduced payment of the 30-year is surely attractive.
On the other hand, following 5 years a borrower that received the 15-year mortgage has paid out $20K whereas a loan taker who took out the thirty year loan has paid out only 5 thousands US$. It comes to a wide spread in wealth accrual of $15 thousands dollar.
The "flexibility" that you believe is the advantage of the thirty year loan is really the liberty to use the difference in payment on other things. However, I’m amazed at how many people opt for a thirty year option to get this freedom, and afterwards see they actually do not like it! Following a few years of owning their homes, the people discover that the thing they actually desire is to accumulate ownership much more rapidly than a 30 allows. They discover, in other words, the importance of the future.
At this point, some of those who took out 30-year mortgages start methodically making extra monthly installments in order to accrue equity faster. Of course, the borrowers would’ve been better off taking the fifteen year loan from the onset and benefiting from the reduced interest rate, but better late then never.
Several of the impatient loan takers are not able to muster the willpower that a voluntary savings program requires. These are the people that are attracted to biweekly installment plans that are provided by several money lenders and/or 3rd party businesses. Under a bi-weekly policy, instead of one monthly payment, a borrower puts down half of the monthly installment every two weeks. This plan means 26 payments a year, which is the equivalent of thirteen monthly installments instead of 12. The additional installment each year builds equity faster.
Because the bi-weekly involves a contractual commitment from the borrower, it provides a discipline that personally designed plans don’t provide. The borrower pays for this self-discipline in the form of an up-front fee and with forfeited interest rates on the additional installment. Those are extra expenses a loan taker might have avoided by taking the fifteen year loan at the beginning.
There’s a single situation where a wealth-maximizing loan taker that is able to afford the payment on the fifteen year loan may nevertheless opt for a 30. A borrower with attractive investment options, like a private business or stocks, may choose a lengthier plan and invest the remainder in mortgage payment for other investments.
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