Should I Refinance To A 15-year Mortgage?
If you currently have a 30-year mortgage and you’re looking at refinance options, you may be wondering if you should refinance to a 15-year mortgage. While there may be some benefits of refinancing to a 15-year fixed loan, it’s important that you consider your situation and your financial goals to determine if it’s the right option for you.
Let’s take a look at what it means to refinance to a 15-year repayment term and how it will affect your monthly budget.
How Will A Refinance To A 15-Year Mortgage Affect Your Monthly Mortgage Payment?
The best way to figure out whether a 15-year mortgage refinance is right for you is to run the numbers with our refinance calculator. Compare your current mortgage payment to the calculator results to see if a refinance makes sense and whether you can afford the larger monthly payment.
In the end, the decision comes down to what the monthly mortgage payment is and whether you can comfortably afford it.
What Are The Benefits Of Refinancing To A 15-Year Mortgage?
Refinancing replaces your old mortgage with a new one that comes with different features. Those new features could include a different interest rate, payment schedule or loan terms. Your new mortgage pays off the old one and still uses your home as collateral.
Let’s take a look at a few reasons people may opt for a 15-year mortgage when they refinance.
Pay Off Your Mortgage Faster
When you refinance from a longer-term loan to a shorter-term one – say a 30-year mortgage, to a 15-year – you shorten the amount of time you have to pay off the loan. If you’re motivated by a desire to pay off all your debts so you can retire early, for example, this is an attractive benefit of refinancing into a shorter repayment period.
You may have chosen a 30-year fixed rate mortgage when you bought your home because you couldn’t afford a larger monthly payment. Perhaps, in the interim, your income has increased and now you feel you can comfortably afford the 15-year mortgage loan payment. Even though your repayment term is longer than it would have been had you been able to afford the 15-year mortgage in the first place, you can still shave a decade or more off your payments and get out of debt faster.
Save Thousands Of Dollars
In addition to getting out of debt sooner by repaying your mortgage faster, you’ll also save thousands of dollars in interest rate charges over the life of the loan.
Here’s an example that will give you a sense of just how much you can save.
Let’s say you have a 30-year mortgage with a current loan amount of $400,000 and an interest rate of 2.99%. You’ve had this mortgage for 5 years and have 25 years left to pay it off. If you refinance to a 15-year mortgage and get the same interest rate, you’ll save about $71,700 in interest over the life of the loan.
Your monthly mortgage payment will go from about $1,895 per month to about $2,760 – that’s about $865 more.
For our example, we kept the interest rate the same for both loans. We did that for simplicity’s sake. You’ll need to compare your current loan rate to the prevailing market rate for refinances. We’ll discuss that more fully later.
The great news is you’ll save thousands of dollars on interest and own your home free and clear 10 years sooner. However, you’ll pay hundreds of dollars more each month until your loan is paid off.
Move Out Of An ARM
If you purchased your home with an adjustable rate mortgage (ARM), you may be nearing the end of your introductory period. If so, you’re refinancing to avoid an adjustment that could make your loan much more expensive.
You have two choices: you could refinance to a new ARM and plan to refinance again when the new introductory period expires, or you could lock into one of the lowest possible fixed interest rates available – the 15-year mortgage.
When you switch from an ARM to a 15-year fixed loan, you’re changing the terms of your loan by going from an interest rate that changes (after the fixed period expires) to one that remains the same through the life of your loan.
ARMs Vs. Fixed-Rate Mortgages
Switching from an ARM to a fixed-rate mortgage provides stability and predictability. You’ll always know what your interest rate will be. This can help with budgeting because your monthly payment on your principal balance and interest won’t change. It can also provide peace of mind that you won’t be paying more if rates increase.
While the advantages are tempting, consider how long you’ve had your loan and how long you plan on keeping it. ARMs typically start with a fixed rate for a specific amount of time – usually 5, 7 or 10 years. Should you refinance to a 15-year mortgage before that time is up, you could end up paying more in interest, since fixed-rate loans may have higher interest rates.
If you’re thinking about refinancing to a 15-year loan from an ARM, consider waiting until after your fixed-rate period ends. If you’re not planning on living in the home long after it ends or plan on moving before it ends, you may not want to refinance.
Another important factor to consider is the cost of refinancing.
Average Costs Of Refinancing To A 15-Year Mortgage
As with any loan, a refinance may come with certain fees, including:
- Application fee
- Credit report fee
- Appraisal fee
- Recording fee
- Title search and insurance
While the costs will vary depending on your loan and lender, you can expect to pay about 2% – 6% of your loan balance. For example, if you refinance a $200,000 loan, you can expect your closing costs to be around $4,000 – $12,000.
If you’re considering refinancing to save money, keep in mind the costs and fees to refinance. How long will it take for you to recoup these expenses? Will you stay in the home long enough for that to happen? If not, you aren’t saving money.
How To Decide If Refinancing To A 15-Year Mortgage Is Right For You
Should you refinance to a 15-year mortgage? Again, that depends on your situation. If you’re trying to save money right now, you’ll want to compare costs and do the math to make sure you’re actually going to accomplish that – especially if you don’t plan on staying in the home for a long time. If you’re looking to save money in the future and plan on living in your home for many years to come, refinancing to a 15-year loan may be a good option for you.
Here are a few ways to decide.
Compare Interest Rates
Before deciding whether now is the right time to refinance your home loan, you’ll have to compare the interest rates you're paying now versus how much you’ll pay if you refinance.
If you’re looking to lower your interest rate, make sure you compare your current interest rate with the new one you’ll potentially receive with a refinance. 15-year mortgages generally have lower interest rates than 30-year mortgages but come with higher monthly payments. That’s because you’re paying off your balance twice as fast.
Calculate Long-Term Savings
Unlike the example we discussed previously, in real life, you’re unlikely to get the exact same interest rate when you refinance. That’s because mortgage rates depend on a number of factors, many of which are out of both your and your lender’s control.
If your main goal is to pay less interest over the life of the loan, switching to a 15-year mortgage may be the right option. How much you’ll actually save depends on the interest rate available when you refinance and how long you’re shaving off your repayment term.
Review Your Monthly Budget
Remember, no one wants to pay more money for a longer period of time. There’s a reason why people choose a 30-year mortgage. It’s so they can afford the monthly payments.
Being able to afford your monthly mortgage payments comfortably is a worthwhile goal in its own right. If you put yourself into an uncomfortable financial situation, however, you’ll make yourself more vulnerable to unforeseen setbacks, like medical bills or job loss.
There’s no upside in making yourself house poor unless you are absolutely committed to paying off all your debt, say, for example, if it’s your plan to retire early.
If your income has risen substantially, and you’d like to translate that into more aggressive repayment of your home loan, that also makes a great deal of sense if the interest rates are favorable when you refinance.
If your monthly payment is estimated to increase by switching to a 15-year mortgage, it’s important to think carefully about whether there’s room in your budget to afford that payment. If you don’t think you’ll be able to make that required payment every month – and do so comfortably – you may want to reconsider.
Remember, you can still pay off a 30-year mortgage early. You are already free to make higher monthly payments if you can, you just won’t be required to pay that much off each month. Just make sure you let your mortgage servicer know to apply it toward your principal, not interest repayment. That can give you peace of mind, should you have a rough month financially.
FAQs On Refinancing To A 15-Year Mortgage
Is it a good idea to refinance right now?
The biggest advantage of refinancing from a 30- to a 15-year mortgage is paying off your mortgage faster and at a much lower cost. Currently, interest rates are trending upward overall, so it’s possible that repaying your current mortgage off faster will save you both on interest payments and the refinance closing costs.
If you’re looking to fast-forward to the point where you own your property outright and can comfortably afford the increased monthly payment, a refinance to a 15-year loan can absolutely be worthwhile.
Is it better to refinance to a 15-year mortgage or to just make extra payments on my current loan?
As mentioned above, it’s possible to pay off a 30-year mortgage early without needing to refinance. To determine whether making extra payments on your current loan in addition to your monthly payments is the most financially responsible course of action rather than a refinance, consider using our mortgage calculator. This could help to establish your budget and gain a clearer sense of how much you can afford in your efforts to pay down your mortgage sooner.
Can I refinance to a 10-year mortgage?
Yes, it’s possible to refinance your mortgage loan to an even shorter term and set your repayment plan for 8-10 years rather than 15 or 30. However, the more aggressive a repayment plan you establish for your refinance, the more strain it’s going to put on your finances in the shorter term, so it’s crucial to do the math and feel certain that you can handle the financial demands before pursuing a 10-year refinance.
The Bottom Line: If Your Income Has Risen, You Might Like Retiring Your Mortgage Loan Debt Early
Whether refinancing to a 15-year mortgage is a good idea differs for each homeowner. Every borrower will have a different loan amount, interest rate, financial goal and time they wish to stay in the home. These factors all play into the decision to refinance to a 15-year mortgage or not.
If you’re ready to begin the refinance process, start the process online to get the ball rolling.