When looking at mortgage rates, it’s common to compare 30-year loans. However, you don’t have to lock yourself into a three-decade contract when buying a home or refinancing your existing loan; you can cut that time in half with a 15-year mortgage.

Key Takeaways
  •  A 15-year mortgage means you’ll pay less in interest due to a lower rate and also shorter term, and pay off your mortgage sooner, potentially freeing up room in your budget in the future.
  • However, your monthly payments will be higher due to the shorter repayment schedule.
  • A 15-year mortgage might be a good idea if you can afford the monthly payments or you’re more than halfway into a 30-year mortgage.

What is a 15-year mortgage?

A 15-year mortgage is a home loan paid back in monthly installments over a period of 15 years. These mortgages aren’t just for purchases; if you’re looking to refinance, you can also accomplish that with a 15-year mortgage.

While paying back your loan faster sounds appealing, shortening the loan term means increasing the size of your monthly payments.

Is a 15-year mortgage the right choice for you? Here are six ways to tell if it’s time to refinance:

6 ways to decide if a 15-year mortgage is right for you

1. You can afford the monthly payments

By far the biggest drawback between a 15-year mortgage versus a 30-year loan is the higher monthly payment. 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?” says Jeff Lazerson, president of Mortgage Grader.

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 might 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 says, you’re probably in a good position for a 15-year loan.

2. You can reduce your interest rate by at least half a percentage point

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. Shop around for the best rate and review every offer you receive. Currently, 15-year fixed mortgage rates on purchases average , while 30-year fixed purchase rates average , according to Bankrate. Rates are on the rise, so 15-year mortgages can look even more attractive right now.

“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 says.

When you find a rate that looks especially attractive, be sure to lock it in to avoid letting it slip away.

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 might not want to refinance into a new 30-year loan, because doing that would extend your repayment period significantly and you’d 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 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.

“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,” Lazerson says, adding, “It’s really hard to look at your horizon beyond three years. 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

Despite rising rates, the reality is that mortgage rates are still very low, and low enough that some borrowers 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 says, and the result is savings you don’t have to think about. “The beauty of the 15-year is the forced discipline.”

6. You want to retire mortgage-free

One of the better ways to boost your retirement outlook is to have your mortgage paid off when you stop working. If you have a mortgage now that stretches many years into your expected retirement, look at a new and shorter-term mortgage that can be paid off by the time your paychecks stop.

For borrowers 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.

Bottom line

Ultimately, opting for a 15-year mortgage can save a lot of money in the long run. You just need to make sure you have room in your monthly budget to accommodate the higher payments.