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When does refinancing into a 15-year mortgage make sense?

Homeowners weigh their options
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Many homeowners choose to refinance from a 30-year fixed-rate mortgage to a fresh 30-year equivalent. While this can lower your monthly payment, it adds extra years to the total amount of time you’ll be financing your home. That means you’ll pay more in total interest over the combined terms of your original loan and your refinanced loan than you might expect.

Why refinance into a 15-year mortgage?

It can be smart to pursue a refi with a shorter term. Refinancing from a 30-year, fixed-rate mortgage into a 15-year fixed loan can help you pay down your loan sooner and save lots of dollars otherwise spent on interest. You’ll own your home outright and be free of mortgage debt much sooner than normal. Plus, mortgages with shorter terms often charge lower interest rates. Consequently, more of your monthly payments will be applied to the loan’s principal balance.

A 15-year mortgage isn’t for everyone, however. Your monthly payment will likely rise because you’re compressing the repayment schedule over a shorter period. (To come out with a similar payment, you’d generally need to be in the last 10 or 12 years of a 30-year mortgage and be refinancing to a similar rate.) As a result, you’ll have less cushion in your monthly budget, particularly if you’re on a fixed income or in retirement. That extra money you’ll be spending could earn a greater rate of return invested elsewhere. You’ll also have less to deduct in mortgage interest on your taxes.

Yet if you have sufficient cash flow, this strategy can be advantageous, despite the higher monthly payment. Good candidates for a 15-year refinance include homeowners who have lived in their home for several years and have a monthly budget and income that will enable the higher payment while also allowing wiggle room for other expenses, including repairs, maintenance and emergencies.

Before refinancing into a 15-year mortgage, shop around carefully and compare current mortgage refinance rates from different lenders.

Pros and cons of refinancing to a 15-year mortgage

Pros of refinancing to a 15-year mortgage

  • Interest rates for 15-year mortgages are often lower than those on 30-year mortgages. That lower rate, plus a shorter repayment period, can save you tens of thousands (or more) in interest.
  • Paying off your mortgage at a faster pace allows you to build equity more quickly. You can tap that equity in the future via a home equity loan, home equity line of credit (HELOC) or cash-out refinance.
  • You might even reduce your monthly payments if the new rate is significantly lower than the existing rate.

Cons of refinancing to a 15-year mortgage

  • You’ll need to pay for closing costs. If you can’t afford the closing costs of a 15-year refi upfront, you won’t save as much as you hope to.
  • Tying all your money up in your home can be risky, especially if you don’t have an adequate emergency fund.
  • A higher payment can squeeze you monthly budget. If you refi to a 15-year loan and your payments go up, you’ll need to be able to afford that increase on top of other obligations month to month.
  • A higher payment can make it harder for you to make more valuable investments. If more of your monthly budget is going to your mortgage, you might have less to contribute to a retirement plan, other investments and emergency savings, or paying down debt. Along with that, it can make it harder to qualify for other forms of credit like a car loan, since your debt-to-income (DTI) ratio would be higher.
  • Refinancing takes time. The process to refinance involves lots of paperwork and waiting, which can be inconvenient. In addition, applying for a refinance is the same as applying for new credit, which temporarily lowers your credit score.

15-year vs. 30-year mortgage payment schedule

Before converting to a 15-year mortgage, carefully consider the impact on your finances. Evaluate your ability to pay monthly expenses and how the higher payment will affect your capacity to pay down debts and invest, versus staying pat with the remaining term on your existing 30-year mortgage.

If your goal is merely to pay down your mortgage faster, you can accomplish this by simply making periodic extra payments on your existing mortgage loan. If you make enough extra payments over your loan term, you can easily shave time off your loan — even 15 years if you prepay aggressively.

The catch with this strategy is that you might pay a higher interest rate on your current 30-year mortgage compared with a new 15-year loan. You’ll also have the hassle of managing, specifying and sending in extra payments that will need to be applied to your loan principal.

Let’s examine how a lower interest rate and shorter loan term affect the principal amount of a mortgage. In the following scenario, a homeowner with a 30-year, $200,000 mortgage can pay it off in 15 years by adding $524 to each monthly payment.

Adding payments to cut loan term in half
Interest rate Monthly principal and interest Total interest, life of the loan
30-year loan for $200,000, paid off in 30 years 4.00% $955 $143,739
30-year loan for $200,000, paid off in 15 years 4.00% $1,479 $66,288
15-year loan for $200,000, paid off in 15 years 3.5% $1,430 $57,358

To calculate the effect of making extra payments (each month, annually or one time), use Bankrate’s mortgage amortization calculator. Input the loan amount, term and interest rate, then click the “show amortization schedule” button, which reveals a section that lets you calculate the effect of extra payments.

Sign up for a Bankrate account to crunch the numbers with recommended mortgage and refinance calculators.

Is a 15-year refinance right for me?

A 15-year refinance generally makes sense if you can lower your interest rate by at least 1 percentage point, can comfortably afford a higher monthly payment and will be able to recoup your closing costs. Take into account how much you pay in interest today and how many years you have left on your current mortgage

Video: Refinancing into a 15-year mortgage

Questions to ask before you refinance into a 15-year mortgage

  1. Can you afford the higher monthly payment?
  2. Is the money you ultimately save worth the higher payment every month, keeping in mind other goals you may have for the money?
  3. Does the refinance still make sense when accounting for the closing costs on the new loan?
  4. Is the hassle of the refinance worth the monetary benefit?
  5. Will refinancing and paying more each month deplete your savings and emergency funds?
  6. Instead of making higher monthly payments, could you invest the extra money and earn a higher rate of return than the mortgage interest rate you’ll pay?
  7. Do you have other outstanding higher-interest debt (including credit card debt) that you should pay down first?
  8. Do you plan to remain in your home for several years after refinancing so that you can at least recoup what you paid in refinance closing costs?
  9. How many years remain on your current home loan? If it’s less than 18 years, is refinancing to a new 15-year loan worth it?
  10. How secure is your job? What would happen if you became unemployed or earned less in the future?
  11. Is it smarter and easier to simply make accelerated payments on your current mortgage?
  12. How much longer will you be eligible to deduct your mortgage interest paid if you refinance to a 15-year loan?

Bottom line

A number of factors are at play when deciding whether to refinance into a 15-year mortgage, including current interest rates, how long you plan to stay in your home, how many years of payments you have left, whether you want to prioritize other financial goals and what your tolerance is overall for the cost and process. If you can afford the higher monthly payment going from your current 30-year loan to a lower-rate, 15-year one, refinancing could save you significantly.

Written by
Erik J. Martin
Contributing writer
Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.
Edited by
Mortgage editor
Reviewed by
Senior wealth manager, LourdMurray