Though you end up paying more in interest with a 30-year loan than a 15-year loan, you are generally able to deduct 100% of the interest payments for the term of the loan, thus reducing your after-tax cost. A 30-year loan with a 5.75% rate for
someone in the 35% tax bracket costs 4.26% after interest deductions. With a 15-year loan, the monthly payment would be much larger, thereby significantly reducing your discretionary income. By increasing your monthly payment, you can reduce a 30-year mortgage to a 25-year, 20-year or 15-year mortgage, whichever may be appropriate for you at the time. However, it is important that prepayments be allowed on the 30-year loan. By comparison, the 15- year mortgage is inflexible in that you are committed to the larger monthly payment. Over time, money is worth less due to inflation, which is the rising cost of goods and services. For example, in 1983 a first class stamp cost $.20 and now it costs $.37, an 85% increase. Similarly, by selecting the longer-term mortgage you will pay it off with cheaper dollars.If you elect to invest the savings, the alternative opportunities presented might provide you with a return substantially greater than the cost of your mortgage. If you chose not to invest, then the savings can be used to immediately improve your lifestyle. A middle course can also be followed.
