A 15-year mortgage offers several significant benefits to borrowers looking to own their homes quickly and reduce overall interest costs. Mortgage rates have been very low in the last few years, especially for 15-year mortgages. Did you know that just a few years ago, Zillow reported 15 year mortgage under 3% for qualified borrowers?
That makes refinancing your 30-year mortgage into a 15-year mortgage more tempting, but how do you know when you should do it? This article will shed some light on how important refinancing into a 15-year mortgage can be a wise financial move.
Why Refinancing into 15-Year Mortgage Makes Sense
When you are financing your home with a 15-year mortgage, you will always have a higher monthly payment. But you will save big in the long run because you are saving so much in interest costs over a 30 year loan. Also, the rates for a 15-year mortgage will almost always run lower than a 30 year mortgage.
The other reason that some people like to get a 15-year mortgage on a refinance is that after you pay for only 15 years, you are done. You own the house completely. This means that you probably will save hundreds of thousands in interest over the life of the loan.
Here is what to keep in mind when you are weighing a 15-year vs. 30-year refinance mortgage:
- 15-year mortgage: Your first payment is 66% principal and 34% interest.
- 30-year mortgage: Your first payment is 35% principal and 65% interest.
If you have a 30 year mortgage, you will not get the same ratio of principal to interest until year 18.
Another way to think about it: When you get a $230,000 30-year loan, you are going to pay almost as much in interest as the amount of the loan itself! If you convert that into a 15-year loan on a refinance, your total interest paid will only be about $50,000.
How to Know When You Should Refinance into a 15-Year Mortgage Loan
Obviously, making the decision to refinance into a much higher monthly payment loan is a serious consideration. Here are some things that may make it make sense to do this:
- You are going to be making more money now or in the near future. If you are going to have to pay another $700 per month on your mortgage, you should be certain that you will have the income to support the higher payment. Many people tend to earn more money later in their careers, but you need to be sure that is the case so you are not running into financial issues as you get closer to retirement.
- You want to get the lowest possible interest rate. You will have a higher payment, but it sure is hard to beat a mortgage interest rate as low as 2.5%!
- You plan to stay in the house for the long term. This is very important to consider when it comes to refinancing your mortgage at all. If you plan to leave your home in a few years, your refinance savings may be eaten up with the closing costs of the new loan.
- You want to have your home free in clear faster. Generally, people are better off if they have their house paid off faster. This can make planning for retirement a lot easier if you do not have to worry about a mortgage payment.
Benefits of the 15-Year Mortgage Loan
Here are the key advantages of choosing a 15-year mortgage.
Faster Homeownership: The primary benefit of a 15-year mortgage is that it allows homeowners to pay off their homes in half the time it would take with a 30-year mortgage. This means you’ll own your home outright sooner, providing a sense of financial security and the freedom to allocate your money elsewhere.
Substantial Interest Savings: Shorter loan terms come with significantly reduced interest costs. With a 15-year mortgage, you’ll pay considerably less in interest over the life of the loan compared to a 30-year mortgage. This can lead to tens of thousands of dollars in savings.
Lower Interest Rate: 15-year mortgage loans often come with lower interest rates compared to their 30-year counterparts. This means not only paying off the loan faster but also paying less interest on each monthly payment.
Equity Buildup: Home equity accumulates more rapidly with a 15-year mortgage. Increased home equity can provide financial security and open up opportunities for home equity loans or lines of credit for major expenses or investments.
Retirement Planning: For homeowners planning to retire soon, a 15-year mortgage can be a smart choice. By the time retirement arrives, the home could be fully paid off, reducing financial burdens during retirement.
Discipline and Forced Savings: With higher monthly payments, borrowers develop discipline in their budgeting and create forced savings. The accelerated payment schedule ensures consistent progress toward homeownership.
While a 15-year mortgage loan has numerous benefits, it’s essential to consider the higher monthly payments. They may be less flexible and might limit your ability to allocate funds toward other financial goals. Borrowers should assess their current financial situation, long-term goals, and monthly budget when deciding if a 15-year mortgage aligns with their needs and preferences.
Considerations Before Getting 15 Year Mortgage Refinance
As you can see in the above illustration, getting a 15-year mortgage can give you major savings in the long run when compared to other loans. However, like most things in life, the program is not for everyone. Naturally, your payments on a 15-year loan will usually be much higher. In some cases, the payment can be 50% higher than a 30 year loan. That type of increase in payment can be a budget killer for many homes.
You also may want to think about getting a 30 year loan because it can be tougher to qualify for a 15-year mortgage refinance as there are higher debt to income requirements. Before you even think about getting a 15-year mortgage loan, you should make sure that you can handle the higher payment.
Other Options to the 15-Year Mortgage
As you are thinking about refinancing, if you decide that a 15-year fixed rate refinance has payments that are too high, you do have other options. You still may want to refinance your mortgage because current interest rates are so low. But you can just go ahead and refinance your mortgage into another 30 year loan.
Ask your lender for the lowest possible rate, and even think about getting a no-closing cost loan to save more at the closing table. Then, you can send your lender an extra 50% per month so that you are essentially paying a 15-year mortgage. There is no law against that, as long as your loan does not have a prepayment penalty. This way, you can still enjoy a very low interest rate and you can, on your own, pay a 15-year mortgage.
Naturally, if you have a lean month, such as the house needing a new roof or the transmission going out on the car, you can just pay the regular 30-year mortgage payment if you need to. Note that you will still pay more interest this was than if you actually get the 15-year loan, because you are paying a higher interest rate. Still, you will save hundreds of thousands in interest over a 30-year loan.
For many Americans, refinancing into a 15-year loan makes sense because you will be able to save hundreds of thousands of dollars in interest. This will allow you to plan for an easier retirement because you will no longer have a mortgage payment. But you need to be sure that you can financially handle the higher payments. Weigh carefully what you think your income will look like in the next several years so you are confident that you can make those payments.
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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