Will of course you're paying more interest with the 30, because you have use of a "larger" amount of money over time. With the 15 year you are paying back a greater amount of the principal every month and hence pay less interest since you are renting less money at the end of every month. So if you get a 30, but pay the amount for a 15, the 30 would pay off in 15, and the interest would be the same. But now here's a really interesting twist, since the interest schedule is "fixed", they are considering more of the total payment going to interest than is actually in reality. It all gets recalculated at the pay off. But you are getting to claim a greater interest deduction on your taxes by having a 30, but paying it back at the 15 year monthly amount. Only in the 15th year will your interest paid go to almost nothing as far as the lender is concerned.
So on your taxes you would have been able to claim more interest than you actually paid. Does anybody know if the IRS has noticed that, and makes you give it back? <g> Or have I stumbled on a way to scam the IRS? There ain't no way for the IRS to know what you paid extra in principal and to know whether the interest claimed is correct. Only the lender would be able to figure that. And they only bother to refigure it and calculate it at pay off. And they would have to report you as having negative interest that year or something. But as far as the lender is concerned, the last year you did pay some interest, just not very much.
The more I look at this the more I think I've found a way to "legally" scam the IRS. Think of it like this, on the very first payment you pay $1,000 extra, and that goes towards the principal. Now you no longer owe interest on that $1.000 for the next 30 yrs, but the lender reports you as having paid interest on it since the interest schedule is fixed. That interest that you no longer owe, gets taken off your last payment or payments. So if you prepaid say $10,000 in principal, and the loan is at 6% and you have an effective tax rate of say 30%, would you be getting about $180 of "free" money a year from the government until the loan is paid off? If this is true, unless the difference in rates between the 15 and 30 are very much, you should never get a 15. Besides like Smart Money said, the 30 gives you greater flexibility. Yes the interest on the 30 is greater since you get to keep the money longer, "if" you choose to. Can always give it back at the 15 year rate.
Of course this is all kind of silly. With rates so low and the effective in the 3-4% range, why would you ever want to pay it off. The only reason you would want to pay it off, ie give the money back is if you have no use for it. Hey Smart Money, if you give me a million dollars, I'll give you $30,000 back every year. If you ask really nice I'll give you $40,000 a year back. Heck, if you never make me give the principal back I'll give you $50,000 a year back. Such a deal. I'm sure I can think of something to do with a million dollars. <vbg>
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