Hello and welcome to Money Girl’s Quick and Dirty Tips for a Richer Life.

Today’s Topic: Is a 15- or 30-year Mortgage Better?

Last week’s episode was about paying versus not paying points when you get a mortgage, and Episode 16 was about how to decide on a fixed versus an adjustable mortgage. This episode is about another important decision you face when selecting a mortgage: how to decide which loan term is best for you.

A generation ago, the decision was easier because there were fewer choices. Most everyone went with a 30-year fixed loan. Today, there is a wider variety of mortgage loan types and terms. You can choose a 15-, 30-, or 40-year term (and some lenders offer 20- and 50-year mortgages too).

So how to decide?

A longer-term loan, such as a 30- or 40-year loan, gives you the most flexibility. The longer the loan term, the lower your monthly payment, since you’re stretching out repayment over a longer period of time. And since the monthly payment is lower, loans with a longer term are easier to qualify for than loans with a shorter term.

When you get a loan, one of the documents the lender is required to give you is a "Truth in Lending" statement. It’s best to take a seat before looking at it because it shows you the scariest number you’ll see on your loan documents: the total amount of the payments you would make over the life of the loan if you were to keep the loan for the entire term. The shear size of the number can be quite a shock! When I got my first home loan, I was stunned to see that this number was twice as much as the loan amount!

This big number is the reason some people opt for a 15-year mortgage. They want to reduce the amount of interest they’ll pay over the life of a loan. But here’s an important tip: You can get a 30- or 40-year loan instead and pay it down more quickly if and when you want to by making extra payments on the principal. You can choose to pay it off over 15 years or 20 years or whatever other term suits your plans best. This puts you in the driver’s seat and gives your more control and flexibility.

Even if you can afford to make the higher monthly payments of a 15-year loan, going with a 30- or 40-year loan instead will free up more of your money for other purposes, such as funding retirement accounts or other investments. You may be able to invest the money you save (by having a lower payment) in a safe investment at a higher rate of return than the interest rate on the loan. And remember: mortgage interest is tax deductible.

A 15-year fixed loan can be tempting because it typically has a lower rate than a 30-year fixed loan, but it can be risky to have a higher monthly payment and less control over where your money goes each month. And if you lose your job or go through a period of financial difficulty, it will be less stressful if your mortgage payment is lower and more manageable.

With a longer term loan, you’ll have more flexibility and lower monthly payments. You can still pay down your loan more quickly if you want to, but you don’t have to. The choice is yours.

Today, I’m giving away a copy of 106 Mortgage Secrets All Homebuyers Must Learn But Lenders Don’t Tell by Gary Eldred, a book with great tips on selecting the right mortgage. This week’s winner is Ed W. Congratulations, Ed!  Because this week’s podcast is sponsored by GoToMyPC, I’m giving away a second bonus copy of the book. And the winner of the bonus book is Matthew A. Congratulations! Check your e-mail for instructions.

Cha-ching! That's all for now, courtesy of Money Girl, your guide to a richer life.


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