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Many people choose to refinance to a 15-year mortgage from a 30-year mortgage, especially if they can get a lower rate. The 15-year mortgage can set homeowners on the path to build equity faster, pay off their mortgage sooner and pay less in interest over the loan term. But, it often comes with a downside — a larger monthly payment. Let’s break down whether refinancing to a 15-year mortgage is right for you.
Should you refinance into a 15-year mortgage?
It can be smart to refinance to 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 pay significantly less interest. You’ll own your home outright and be free of mortgage debt that much sooner. 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 refinance 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.
Pros and cons of refinancing to a 15-year mortgage
Pros of refinancing to a 15-year mortgage
- Lower interest rate: 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.
- Build equity faster: 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.
- Reduce monthly payments: If your new rate is significantly lower than the existing rate, you could have a lower monthly payment.
Cons of refinancing to a 15-year mortgage<
- 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.
- Less liquidity: Homes are an illiquid asset, meaning that you can’t easily turn them into cash. Tying all your money up in your home can be risky, especially if you don’t have an adequate emergency fund.
- A higher monthly payment: If you refi to a rate that’s not significantly lower than your current one, your payment will increase. You’ll need to be able to afford that increase on top of other obligations month to month.
- Less money for other 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 and lowers your credit score: 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.
How much you can save refinancing to a 15-year mortgage
Before refinancing 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 put with the remaining term on your existing 30-year mortgage.
If your goal is to pay down your mortgage faster, you can do this by making periodic extra payments on your existing mortgage loan. With extra payments over your loan term, you can 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 $450 to each monthly payment.
|Monthly payment (principal and interest)
|*Bankrate refinance averages as of Oct. 5, 2023
|30-year loan for $200,000, paid off in 30 years
|30-year loan for $200,000, paid off in 15 years
|15-year loan for $200,000, paid off in 15 years
When is it a good idea to refinance to a 15-year mortgage?
In general, it is a good idea to refinance to a 15-year loan if:
- You can get a lower rate than your current mortgage rate, ideally by at least a half to three quarters of a percentage point.
- You’ll be in your home long-term.
- You can afford the higher monthly payment.
- Your credit score or income has increased since you were first approved for your loan.
- You have 15 (or more) years remaining on your mortgage.
Important considerations before you refinance into a 15-year mortgage
- Have you had your current mortgage long enough to refinance?
- Can you afford the higher monthly payment?
- Will you remain in your home long enough to break even?
- Will a higher monthly payment get in the way of other financial goals, like having an emergency fund, paying down credit cards, investing and saving for retirement?
- 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?
- How secure is your job? What would happen if you became unemployed or earned less in the future?
- Is it smarter and easier to simply pay down your current mortgage?
- How much longer will you be eligible to deduct your mortgage interest paid if you refinance from a 30-year to a 15-year mortgage?