The old saying that bigger is better doesn't always hold true when it comes to mortgage terms. In the past, many financial planners discouraged choosing a 15-year mortgage over a 30-year one for two very good reasons. First, your monthly payment would be much higher with the shorter term. And second, your money would be locked up in mortgage payments, which meant that if, heaven forbid, a financial emergency occurred, you might be short on funds.

However, with mortgage rates still hovering at 50-year lows, financial planners are giving second thought to recommending the 15-year loan.

Lower mortgage rate

One of the main reasons to take advantage of a 15-year term is to take advantage of a lower mortgage rate. Even though your monthly payment will be higher, you'll pay off your loan earlier, and your total payments will be significantly lower. As an example, if you had a $250,000 30-year mortgage at an interest rate of 4.5 percent, your monthly payment would be $1,230. That same mortgage with a 15-year term at an interest rate of 4 percent would cost you $1,850 each month. On the surface, it doesn't sound like a good deal - until you look at the total interest payments. For the longer loan, the amount you'd pay to own your home would be $456,018. But for the shorter one, your total payments would only be $332,860. That's a difference of $123,158 that would remain where it should be - in your pocket.

Leave the bank behind

When it comes to home equity, the shorter 15-year mortgage term has two distinct advantages. First, since more of your payment is going toward reducing your principal, you'd be building home equity more quickly. And the best perk of all - you'd be free and clear of the bank, and you'd become a full-fledged homeowner in half the time, than had you opted for the longer mortgage.

A financially stable retirement

The outlook for Americans reaching retirement age is becoming exceedingly bleak. A recent poll of financial advisors by the brokerage house Scottrade revealed that these investment pros felt that having $1 million in the bank was simply not enough for a comfortable retirement. Tell that to the 43 percent of Americans who have less than $10,000 in savings!

If you're a retired homeowner who no longer carries a mortgage, you have a distinct retirement advantage. If you're living on a fixed income, you won't have the additional monthly payment to worry about. And by having a 15-year mortgage, the odds are higher that you could enter retirement mortgage free. Additionally, if you find yourself short of funds, you could tap into your home equity by taking out a reverse mortgage or using money from a home equity line of credit (HELOC).

Bigger may be better when it comes to buffets, retirement accounts, or TV screens, but when it comes to mortgage terms, you may ultimately be better off with the smallest one you can comfortably afford.

Published on September 21, 2010