Most Americans dream of owning their own home, and owning their home free and clear of a mortgage.  While that may be a noble goal, they go about it the wrong way.  To assist in emphasizing this fact, we will take a look at a couple who are trying to decide which loan is better for them.  Here is their scenario...

John and Jane are in their early thirties and expect to be working for another 30 to 35 years before retiring.  Traditionally, most couples in their position would have gone for the 30-year conventional home mortgage.  John and Jane, however, have some friends that have 15-year mortgages and love them, so John and Jane now are wondering if they should get the 15-year mortgage.

While they remain optimistic about their earning power, like most of us, they remained concerned about having a mortgage for 30 years.  They began to think that a 15-year mortgage is a better idea.  After all, they would pay off their house quicker and then they could use that mortgage money for other things. 

They did the proper thing and began to research the different products, reading articles, talking with bankers, mortgage brokers, and even financial planners.  They get lots of conflicting advice, which leaves them even more confused.  From the information they have received, the list the following advantages and disadvantages of each type of loan...

15-Year Mortgage

Advantages
Mortgage Paid in 15 Years
Less Total Interest Paid (can be more than 50% less)
Lowest Interest Rate Possible
Quicker Equity Build-Up

Disadvantages
Larger Monthly Payment
Requires More Income to Qualify
Ties Up Greater Percentage of Income Each Month

30-Year Mortgage

Advantages
Lower Monthly Payments
Easier Qualification (Less Income Required)

Disadvantages
Takes 30 Years to Pay Off
More Total Interest Paid
Slower Equity Build-up

They ultimate decide to get the 15-year mortgage because they want to build equity faster.  They wanted this so they could take out a home equity loan or larger mortgage sometime in the future.

The monthly payments are 22% higher on the 15-year mortgage, however their total interest payments will be 44% less in comparison.  Each month sees principal payments increasing faster and les and less interest being paid, thus tax savings are reduced.  Even though their monthly spendable income will be reduced, they believe it is worth it to save all that interest.

John and Jane felt very lucky to get the 15-year mortgage due to their combined incomes allowing them to qualify.  After a few years, they decided they wanted children, however their finances and the high monthyl payment made it seem impossible to afford children since Jane believed a mother should be home with the children.  Since interest rates were higher than before, it did not make sense to refinance.  They accepted the fact that they could not get by and reluctantly decided against raising a family right now.

Several years later, they were proud to see they were quickly paying off their mortgage, but found themselves unhappy when it came time to complete their taxes.  They found that their tax burden was increasing more and more as they paid off their mortgage, in fact, they were paying income taxes at nearly the maximum rate.

Now, unexpectedly, John gets laid off.  They still have the large mortgage payments to make and do not have very much in savings.  They quickly burn through what savings they did have while John looks for work.  They face a common problem now because they cannot qualify for a new mortgage and they cannot afford the monthly payments.  Unfortunately, they must sell their home to get out of the mortgage or face foreclosure in the near future.  To manage a quick sale to avoid foreclosure, they had to lower the price of the home and lose a lot of the equity they tried so hard to build up.

Looking back, they regretted getting into the 15-year mortgage and wished they had the reduced burden of lower monthly payments and increased tax deductions.

(do to the length of the analysis, I figured I better split it up, so there is Part 2 coming soon, believe me that Part 2 is a must read.)