The advantages of a 15-year loan over a 30-year include the obvious shorter term, usually a slightly lower interest rate and that equity builds faster. The disadvantages are higher payments that are required regardless of temporary personal economic conditions.
If a borrower is experiencing unexpected expenses that make it difficult to make the higher payments on the 15-year loan, there is no option to make a lower 30-year payments until the situation improves.
The borrower could have originated a 30-year loan but make payments like it were a 15-year loan. The additional amount would be applied to the principal which would still save interest, build equity faster and shorten the term of the mortgage. The big difference in this scenario is that the higher payment is optional.
If the situation arises, the borrower is only obligated to make the 30-year payment. When the situation improves, the borrower can resume the higher payments to retire the loan early.
A $300,000 mortgage at 3.6% for 30 years has a P&I payment of $1,363.94. If it were amortized for 15 years, the payment would be $2,159.41 or $795.47 more.
Let’s assume you made the higher payment for three years and then, made the lower payment for six months due to some financial situation. After that you resumed the higher payment each month. At the end of ten years, the unpaid balance would be $124, 485.48.
The 15-year loan would have an unpaid balance of $118,411.03. When you factor in the six months of lower payments that were made, there is only a $1,301.63 difference.
Using the option of the 30-year loan and paying it like a 15-year can provide options that may be very beneficial should unexpected financial conditions occur. Since unexpected expenses are more common than unusual, getting the 30-year is almost planning for the inevitable while trying to meet your goal of paying the loan in a shorter period.