Trying to decide between a 30-year mortgage and a 15-year mortgage? Go with the 15-year mortgage to save money and be debt free.

Q: I caught a portion of a response you made on your radio show about comparing a 30-year loan versus a 15-year loan. If I understood you correctly, the difference between these loans might be only \$35 to \$40 per month. Information I’ve gotten from other sources says it would be considerably more.

Am I correct in what I thought you said? Thanks.

A: You only caught a portion of the question. In that question, the caller had a 30-year loan and was refinancing from a much higher interest rate. If she refinanced from her existing 30-year loan and dropped the interest rate on her loan by the 4-5 percentage points she had on her existing loan, she could go from that 30-year loan into a new 15-year loan and pay about what she was paying before plus about \$30 more per month.

When you compare a new 30-year loan against a new 15-year loan, the monthly payments on the 15-year loan will be significantly higher. For example, considering a \$100,000 loan, the monthly payment on a 30-year loan at 3.5 percent would be about \$450 but on a 15-year 3 percent loan, the monthly payment would be about \$690. (You get a little break because the interest rate on a shorter-term loan will be less than on a longer-term loan.)

As you can see, the monthly payment is significantly more on the 15-year loan. But if you have not refinanced in the last 7 or so years and your interest rate on your original 30-year loan was 7 percent, your monthly payment would have been around \$650. In this case, refinancing from a 30-year into a 15-year loan might make sense. Your payment would go up about \$40 per month, but you’d end up paying off your loan in 15 years and saving money, rather than 23 years on the original loan or 30 years, if you refinance into a new 30-year loan.

As some people approach retirement age, they might prefer to own their homes outright, without loans. For these people, today’s low interest rates give them an opportunity to take advantage of 15-year mortgages and approach retirement debt free.

Which is always a good idea.