I’m going to attempt to answer the age-old question: 15 vs 30 year mortgage: which is best?

And I hate to break this to you, but it all depends (and I’m not even going to mention taxes here).

I want to start off with a table (it’s the accountant in me) outlining some basic assumptions when answering the 15 vs 30 year mortgage question. Hopefully this sheds a bit of light on these different mortagages right off the bat:

	15 vs 30 year mortgage
	30 year	15 year
Loan:	$175,000	$175,000
Rate*:	5.41%	5.01%
Payment:	$984	$1,385
Total paid:	$354,158	$249,264
Total interest:	$179,158	$74,264

* Rates taken from BankRate.com on 18 April 2005.

Alright, if you only looked as far as the payment line, you might’ve received a bit of a jolt. The 15 year mortage requires you pay out another $401 per month for the life of the loan! Take a deep breath. You don’t pay anything else on the 15 year mortgage after 15 years (makes sense eh?).

If you checked out the last two lines of the table you might have received a jolt in the other direction. If you do a 15 year mortgage you will save $104,894 verses the 30 year mortgage!

Clearly the 15 year mortgage is the best option? It depends.

One thing you absolutely have to consider with the 15 vs 30 year mortgage question: opportunity cost.

Consider this: what if you did indeed take a 30 year mortgage, saving $401 in monthly cash flow, and invested that $401 each month for the life of your mortgage? If you invested it in a mutual fund earning 9% (let’s not get into a debate about potential stock market returns at the moment), that investment would grow to $734,181!

So clearly your best option is to pass up the 15 year mortgage, stick with the 30, and invest the difference in savings. Not quite.

First off, you have to remember the extra interest cost (remember, I’m not including taxes in the analysis), of the 30 year mortgage: $104,894. So you’ll need to reduce that investment amount from approximately $730k to a more appropriate $555,024.

Well, still another half million dollars makes the 15 year an inferior choice. No, not quite.

It’s not fair that you can invest the difference in savings for those 30 years without looking at the 15 vs 30 year mortgage question from a different angle. If you take the 15 year mortgage, you’ll have that entire payment available for investment once you’ve paid off your house.

So, in actuality, we need to compare the two side by side. Taking the 30 year mortgage allows you to save $401 for the life of the loan. If you take the 15 year mortgage, you’ll not save anything for the first 15 years, but then you’ll have $1,385 to invest for the last 15 years. What does that investment equate to? Again, using 9%, $1,385 invested monthly for the second 15 years results in a value of $524,017. Does that mean the 30 year mortgage is about $30,000 (555,024-524,017) better? Nope. You’ll need to take the interest cost out of the 15 year mortgage value just as you did with the 30 year. With this analysis, the 30 year mortgage outpaces the 15 year mortgage by $105,271.

Ah ha! Clearly the 30 year mortgage is the best choice for your finances. Um, maybe.

We have assumed a 9 percent return on your investment of that $401 monthly savings. What happens if the actual return were only 5 percent? You would lose money. I used Excel’s “Goal Seek” tool to give me the required rate of return that $401 monthly investment would need to make someone indifferent (meaning you would break even) with the 15 vs 30 year mortgage question. The break-even rate of return is 7.82 percent. Basically, you would need to make sure you had a return 2.41% above your 30-yr fixed rate (assuming these BankRate.com numbers of course) to make sure you at least broke even. Any return below that and you would have been better off with the 15 year mortgage.

But we really should slow down and take a look at the personal side of personal finance. We really should be talking a lot more about peace of mind and a lot less about the numbers.

Consider this question: How much is your peace of mind worth? I personally believe one derives a lot of peace of mind from being debt free (I am completely debt free by the way). Is your peace of mind worth $105,271 over a 30 year period? Maybe I should break that down a bit. Is your peace of mind worth $292 per month? What I’m trying to get at here is this: to be debt free is something quite out of the ordinary - quite extraordinary in our day. The 15 vs 30 year mortgage question should be answered considering your peace of mind.

Honestly answer these questions:

1. Would you really invest that $401 savings?
2. Do you feel certain that if you did, your money would give you a return greater than 7.82 percent?
3. How would it feel to be completely debt free?

I ask you these questions because I think these answers will ultimately help you find the answer to the 15 vs 30 year mortgage question. If you answered “No” to question one or two, then I strongly encourage you to choose the 15 year mortgage. It guarantees you get out of debt in 15 years.

I personally have chosen to be debt free. It’s worth it!

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