refinance

Refinance into a 15-year mortgage and save

Refinance » Refinance Into A 15-year Mortgage And Save

Refinancing into a 15-year mortgage is a common way of taking advantage of today's low interest rates.

With the interest rate differential between a 30-year fixed mortgage and a 15-year fixed mortgage hovering at around 1 percentage point, borrowers continue to find this an attractive refinancing option.

Check 15-year mortgage rates offered in your area.

Mike Henry, senior vice president for residential lending with Dollar Bank in Pittsburgh, notes, "When we get into times of high volumes of refinancing, like we've had for the last two to three years, 15-year is more than half of what is refinanced. A lot of that is people in 30-year loans refinancing to 15. There are a lot of benefits going from a 30 to a 15."

15-year loans cost less interest over time

One benefit is that by switching to a lower mortgage rate and term, you would save on the interest payments you make for the duration of the mortgage.

Henry cites the example of a borrower with a $200,000 30-year mortgage at 5 percent and a monthly payment of $1,074. By refinancing into a 15-year mortgage after five years with the 30-year mortgage, she would end up paying about $1,288 a month, but would end up saving around $90,000 in interest payments.

Scenario 1: 30-year loan, no refinance

Pat gets a $200,000 mortgage at 5 percent and pays it off in 30 years:

30-year fixed
Interest rate5%
Loan amount$200,000
Monthly payment$1,074
Total interest paid$186,512

Scenario 2: Refinance to 15-year loan

Alex gets a $200,000 mortgage at 5 percent. Five years later, Alex refinances the outstanding balance of $183,349 into a 15-year mortgage at 3.5 percent:

First 5 years: 30-year fixed
Interest rate5%
Loan amount$200,000
Monthly principal and interest$1,074
Interest paid in 5 years$48,841
Next 15 years: 15-year fixed
Interest rate3.25%
Loan amount$183,349
Monthly principal and interest$1,288
Interest paid in 15 years$48,552
Total interest paid in both loans$97,393

15-year lets you pay off loan faster

You pay off a loan faster with a 15-year mortgage because the term is shorter, so you end up free of mortgage debt faster.

Bruce Luecke, vice president of product development for Nationwide Bank in Columbus, Ohio, says, "This might be skewed towards people who have more disposable income and want to pay off their loan faster. Certainly, the opportunity is to free themselves faster from housing debt, if that's what makes sense for them personally."

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You could decide instead to keep the 30-year loan and continue with a lower monthly payment and invest the money in hopes of a higher return.

15-year loans charge fewer fees

Another benefit is that you could pay lower fees to get a 15-year mortgage.

Fannie Mae and Freddie Mac charge fees, called loan-level price adjustments, that vary according to credit score and loan-to-value. The fees are " applicable for all mortgages with terms greater than 15 years" -- so they don't apply to mortgages of 15 years or shorter.

For borrowers who are comfortable with the higher 15-year payment, and who would have to pay these fees on a 30-year loan, "the 15-year is a nice option," says Bob Walters, chief economist for Quicken Loans in Detroit.

But 15-year loans have higher payments

The downside to refinancing into a 15-year mortgage is the higher monthly payments.

Comparison: $275,000 mortgage, 30-year vs. 15-year

Term30 years15 years
Interest rate4.25%3.5%
Monthly principal and interest$1,353$1,966
Total interest paid$212,020$78,867

Some borrowers might prefer to keep a 30-year mortgage and make higher payments whenever they feel comfortable doing so, in a bid to pay off the loan faster without tying themselves down to a required higher payment. This approach is more common when the rate differential between the 15-year and the 30-year mortgage is low.

Try Bankrate's calculator to help you decide between a 15-year or 30-year mortgage.

Another wrinkle: The 15/15 ARM

While the refinancing discussion typically centers on refinancing into a 15-year fixed mortgage, how about refinancing into an adjustable-rate mortgage that could be described as a 15-year hybrid ARM?

Pentagon Federal Credit Union in Alexandria, Virginia, offers an ARM with a fixed rate for the first 15 years. It adjusts once after that, keeping the adjusted rate for the next 15 years. The rate increase is capped at the initial rate plus 6 percent.

The initial interest rate is between the rates on 15-year and 30-year fixed-rate mortgages.

Henry calls it an interesting product that benefits from having a lower interest rate, although it is amortized over 30 years, so the loan isn't paid off faster. It's an option for borrowers who plan to sell their homes within 15 years.

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Product Rate Change Last week
30 year fixed 4.29%  0.01 4.30%
15 year fixed 3.23%  0.06 3.29%
5/1 ARM 3.33%  0.12 3.45%
 
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