From the Mailbag

I’m thinking of buying my first home! One quick question: how do I decide between a 15 and 30 year loan?


Congratulations, Gary! That’s a big step, and I’m happy to help you with this huge question. For most people, taking on a mortgage is the largest debt they’ll ever owe. It’s important to do it right.

I’ve noticed some advisors like one type of mortgage better than another. I think each type exists for a specific reason. Unfortunately, this means I won’t be able to answer your question directly, but I can give you some tips to help along the way:

First, you didn’t ask about adjustable rate mortgages–where the initial interest rate is low but can adjust to a higher amount after a specified period of time–but for the vast majority of people, they aren’t a great idea right now. Interest rates are at near all-time lows, so locking into a fixed rate mortgage is best for most home buyers. The exception? If you are absolutely certain you’re going to move again soon, an adjustable rate will save you money.

15 year loans are best for people who want to pay off their mortgage quickly and need the forced discipline of a larger payment. The upside of a 15 year loan is that you’re guaranteed to be mortgage-free in 15 years (assuming you remain in the home). The downside? If you lose your source of income, the monthly payment on a 15 year mortgage will be much harder to meet than a 30 year payment.

30 year loans work best for people who want the flexibility of a lower mandatory house payment. It’s a mistake to think that people with 30 year loans will pay them off over a long period of time. On the contrary, I’ve met quite a few successful savers who chose a 30 year loan and then paid significantly more than the amount due each month. Why? If they ran into financial trouble, their monthly payment was pretty low, and the chances they could meet the payment was better than if they’d bitten off the higher 15 year payment.

Don’t take out the 30 year loan and “hope” to make extra payments. Set up an automatic payment plan for more than the requested amount so that you’re still forced to pay your home off early.

I hope this helps and I wish you happy house hunting! Send us a picture! 🙂