15 vs. 30-year Loan

Having a 15-year mortgage or a 30-year mortgage can have the potential to be the same if you save and invest the difference. However, the shorter loan costs you more in taxes over the 30-year period. It is important to note that it is possible to lose money, including principal, in investments that carry market risks.  If this were to occur, having a 30-year mortgage while investing the difference would likely not be beneficial.

One of the reasons people choose a shorter loan period when financing is they think once they get their house paid for they will be able to save more.  This screen demonstrates that if you save and invest the difference between a 15-year and a 30-year mortgage you would have the same amount as one who paid their house off in year 15 and began saving and investing their entire monthly payment - assuming the same interest rates.  There are some advantages however to having the 30-year note.  Which one of these two paid the most in taxes over the 30-year period?  Correct the one with the 15-year loan.  There are more tax deductions in the first 15 years of a 30-year loan than there are in the 15 years of a 15-year note.  Another major consideration is the fact that the person with the 30-year loan had access to their money the whole period and if it is prudent for them to pay there house off in year 15, they have that option.  It makes even more since if mortgage interest rates are low to lock in the longest loan period, maximize what tax benefits are available today, and pay the note off in one check using inflated dollars down the road.

Most people would agree with this assumption but some comment that this strategy works only if the party is disciplined enough to save and invest the difference between the 15 and 30-year mortgages.  While this line of reasoning seems correct, there are very few who will find more discipline in 15 years to save and invest their entire house note than they have today to save the difference between the two positions.

Documentation calculations are performed in a series of worksheets defined as follows:

Side Fund Investment for 15 years

Column 1: Balance at beginning of month.

Column 2: Monthly interest earned: (Column 1 * Investment ROR/12).

Column 3: Monthly deposit of 15-year mortgage payment (E.O.M.).

Column 4: Account balance at the end of the month: (Column 1 + Column 2 + Column 3).

Side Fund Investment for 30 years

Column 1: Balance at beginning of month.

Column 2: Monthly interest earned: (Column 1 * Investment ROR/12).

Column 3: Monthly deposit of difference between 15 and 30-year mortgage payment (E.O.M.).

Column 4: Account balance at the end of the month: (Column 1 + Column 2 + Column 3).