Higher payments, less interest
Let's take the hypothetical example of Lynn, who got a 30-year mortgage for $210,000 in March 2014, with an interest rate of 4.5%. About 2 1/2 years later, Lynn refinances $200,000 for a lower interest rate. Lynn has excellent credit and can get a 30-year, fixed-rate loan at 3.625% or a 15-year loan for 2.875%.
How refinancing mortgage can save you money
| ||Current loan
|30 years||15 years|
|Monthly principal and interest payment||$1,064||$912||$1,369|
|Total interest paid||$173,054||$128,366||$46,451|
Refinancing at the lower rate into another 30-year loan saves $152 a month and almost $45,000 in interest. Refinancing into a 15-year loan increases the monthly payment substantially ($457 more), but the lower interest rate saves Lynn a ton in interest payments (almost $82,000!) over the life of the loan.
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Not everyone can afford the higher payments of a 15-year mortgage.
"We see some going both ways," says Matt Hackett, operations manager for Equity Now, a mortgage lender based in New York City. "We see people go from a 15-year to a 30-year to lower their payment, and we see some going for a 30 to a 15 to get a lower rate."
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Matthew and Persis Dean, who live in Houston, got a 30-year mortgage in 2008 with an interest rate of 5.625%. Five years later, they refinanced into a 15-year loan with an interest rate of 2.75%.
"We decided to refi for 2 main reasons," Matthew Dean writes in an email:
- Got a raise, so had a little bit more disposable income.
- Interest rates were dropping.
"The reason we did a 15-year is because we could afford it -- with the interest-rate drop, we were only paying 15% more per month than previously what we were paying on a 30-year. The savings over the life of the house were too good to pass up."
Matthew Dean says the refinance was pain-free and didn't cost much. Three years later, he's glad they refinanced.
"Our personal financial situation has improved, so we have been lucky in that respect because we took a bit of a plunge with the higher payments."
Lower fees with a 15-year
There's another benefit to getting a 15-year mortgage: Fewer fees.
Fannie Mae and Freddie Mac charge fees, called loan-level price adjustments, that vary depending upon the borrower's:
- Credit score.
- Loan-to-value ratio.
- The type of dwelling.
- Other factors.
But in many cases, these fees are not charged on mortgages of 15 years or fewer. (Exceptions to this rule include cash-out refinances and investment properties.)
In many cases, loan-level price adjustments aren't charged as fees, but are transformed into slightly higher interest rates. Either way, the lack of these fees on 15-year mortgages tilts the field further in favor of 15-year mortgages.
Try Bankrate's calculator now to help you decide between a 15-year or 30-year mortgage.