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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. |