With mortgage interest rates moving up from historic lows, 15-year loans are getting more attention. Their lower rates compared with a standard 30-year mortgage make them a good choice for buyers and homeowners looking to refinance.
If you’re researching mortgages, a 15-year loan is definitely worth considering. Here are some ways to know if a 15-year mortgage is the right fit for you.
1. You can afford the monthly payments
By far the biggest drawback to a 15-year mortgage is the higher monthly payment compared with a 30-year loan. Yes, 15-year mortgages tend to have lower interest rates than their 30-year counterparts, but because you have to pay off the balance in half the time, you wind up laying out more each month while you’re making those payments.
“That’s usually where everyone’s stress is. It’s not necessarily that they can or can’t afford it as far as the lender is concerned, it’s, can they deal with it in the family budget?” said Jeff Lazerson, president of MortgageGrader.
It’s important to do your homework and analyze all your costs. You’ll save a ton of money in the long run by paying less interest overall on a 15-year mortgage, but it may not be worth maxing out your monthly budget to get that savings.
“If thinking about it doesn’t keep you up at night worrying,” Lazerson said, you’re probably in a good position for a 15-year loan.
2. You can reduce your interest rate by at least half a percent
Lowering your interest rate is a great reason to consider a 15-year mortgage, but it can be an expensive proposition if you’re not getting a good enough rate.
So, make sure to shop around for the best rate and analyze every offer you receive. Currently, 15-year mortgages average 2.52 percent, versus 3.18 percent for a 30-year. These rates include some points and fees.
“If it’s just a little bit better than what you have, you can always wait and see, but if it’s significantly better, say, half a point or more in interest rate, don’t wait,” Lazerson said.
You shouldn’t hesitate just because you want to find the absolute bottom of the market, which probably happened in January. You could miss out on good offers and significant savings if you wait too long.
3. You’re more than halfway through your 30-year mortgage and want to refinance
When you refinance, you start the repayment clock again as soon as you close on your new loan. If you’ve already been paying toward a 30-year mortgage for 15 years or more, you may not want to refinance into a new 30-year loan, because doing that would extend your repayment period significantly and you would have to pay even more interest overall.
However, by refinancing a 30-year mortgage into a 15-year one, you’ll keep your payment timeline the same and will reduce the amount of interest you wind up paying.
4. You can break even on your closing costs in three years or less
The breakeven timeline is a key thing to think about with any mortgage refi.
Refinancing comes with a variety of closing costs and other fees that eat into your savings at first. Lazerson said it’s not usually worth it to refinance if it’s going to take too long to recoup those costs.
“If you can recoup your costs in three years or less, it almost always makes sense to do it unless you’re going to sell in less than three years,” he said. “It’s really hard to look at your horizon beyond three years,” he added. “You might get a job transfer, you might end up hating your next door neighbor and you want to move. Maybe you want to do a room addition on your house and you’re going to refinance later anyway.”
Not recouping your costs soon enough could put you in a more precarious financial situation down the road if an unexpected expense comes up, or if you need to change your housing situation on short notice.
5. You haven’t refinanced in a while
Thanks again to the ongoing trend of low mortgage rates, most current homeowners stand to save by refinancing if they haven’t done so in the last year.
“Rates have gone down so much in the last 12-24 months even, if you did a loan a year ago, you’re probably in a good opportunity to save money,” Lazerson said. “If you did something prior to March or April of 2020, you should really look at it again.”
Interest rates are still low enough that some mortgage holders who refinance old 30-year loans into new 15-year ones can actually keep their monthly payments pretty similar.
“People are able to shorten the amortization period,” Lazerson said, and the result is savings you don’t have to think about. “The beauty of the 15-year is the forced discipline,” he said.
6. You’d like to retire mortgage-free
There’s no better way to boost your retirement outlook than to have your mortgage paid off when you stop working. If you have a mortgage now that stretches many years into your expected retirement, you’d be wise to look at a new and shorter-term mortgage that can be paid off by the time your paychecks stop.
For people aged in their mid-40s to 50s, refinancing now into a 15-year mortgage guarantees you’ll have a lot more room in your monthly budget if you want to retire in your 60s. Just make sure your current budget can accommodate the higher payments. If you’re not sure, it might be best to make additional principal payments on your current mortgage so you’ll have the flexibility to cut them back if times get tough.
That said, if your current interest rate is a half-point or more above what you could get now, refi into a new 30-year mortgage and you’ll cut your interest costs. Then you can direct the savings into additional principal payments.