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Important points
Refinancing your 30-year mortgage to a 15-year mortgage can save you a lot of money in interest and help you pay off your mortgage faster.
A 15-year mortgage has higher monthly payments, but it can also help you build equity and eliminate mortgage debt faster.
Research and compare interest rates from different lenders to find the best 15 year loan offer.
As mortgage rates drop, more homeowners consider refinancing, and in some cases, refinancing to 15-year loans. While a 15-year mortgage allows you to build equity faster and pay off the loan faster, potentially paying less interest, there are downsides. Let’s take a closer look to see if refinancing to a 15-year mortgage is right for you.
Should I refinance to a 15 year mortgage?
Before refinancing to a 15-year mortgage, consider the following:
- Did you have a current mortgage? Enough time to refinance? Most lenders will require a certain period of time, known as “seasoning,” to pass before they can refinance into a new loan.
- Can you afford high monthly payments? If you refinance from a 30-year loan to a 15-year loan, you’ll be paying off the new loan in half the time, which could increase your monthly payments even if your overall balance is lower.
- do you stay at home Long enough to break even? There are closing costs associated with refinancing. Even if you refinance to a lower interest rate, it can take up to several years to recoup the initial cost.
- Will higher monthly payments get in the way of other financial goals? Do you have enough cash flow to maintain your emergency fund, save for retirement, and reach other financial milestones?
- How secure is your income? A shorter mortgage term means higher monthly payments and a tighter repayment schedule. Could any of this become an issue if you lose your income?
- Should I pay more on my current mortgage? If your main goal is to have your mortgage forgiven and forgiven, you can accomplish that by making additional payments toward your principal. You won’t get a new interest rate or term, but you won’t have to apply for another loan.
Advantages of refinancing to a 15-year mortgage
- Lower interest rate: Interest rates on 15-year fixed loans are lower than on 30-year mortgages. Lower interest rates and shorter repayment terms can save you tens of thousands of dollars (or more) in interest.
- Build assets faster: By paying down your mortgage at a faster pace, you can build equity more quickly. In the future, you can tap into that equity through a home equity loan, home equity line of credit (HELOC), or cash-out refinance.
- Possible reduction Monthly payment: If your new rate is significantly lower than your existing rate, your monthly payments may be lower.
Disadvantages of refinancing to a 15-year mortgage
- Potential for higher monthly payments: Because a 15-year loan has a shorter term, your monthly payments may increase. You need to be able to afford it in addition to your other monthly obligations.
- Closing costs: If you can’t afford to pay the closing costs of a 15-year refinance upfront, you won’t save as much as you hoped.
- Other costs: The refinance process requires paperwork and waiting time, which can be inconvenient. Additionally, applying for a refinance will temporarily lower your credit score.
- Spend less money on other things: Homes are illiquid assets and cannot be easily converted into cash. Aside from that risk, if a large portion of your budget goes toward paying a high 15-year period, you may have less money for retirement plans, other investments, emergency savings, or debt repayments. If you are overleveraged, it can also be difficult to qualify for other forms of credit.
How much can you save by refinancing to a 15 year mortgage?
Refinancing is all about numbers. Let’s say our borrower took out a 30-year, $265,000 mortgage at 3.9 percent in 2019. Fast forward 5 years and now: Mortgage rates are now in the 6s. Can a borrower save money by refinancing to a 15-year term, even at a higher interest rate?
| balance | Loan period | interest rate | monthly payment | interest paid over a period | Interest savings over time |
|---|---|---|---|---|---|
| $265,000 | 30 years | 3.90% | $1,250 | $184,971 | $0 |
| $238,351 | 15 years | 6.15% | $2,031 | $127,176 | $57,795 |
In this scenario, the borrower could refinance to a 15-year loan and pay approximately $780 more each month, saving significantly in interest (lower closing costs). If you have that kind of flexibility in your budget and you intend to pay off your mortgage five years sooner than you would with a 30-year loan, refinancing may make sense.
Now let’s say interest rates decreased instead of increasing from 2019. The example above would look like this:
| balance | Loan period | interest rate | monthly payment | interest paid over a period | Interest savings over time |
|---|---|---|---|---|---|
| $265,000 | 30 years | 3.90% | $1,250 | $184,971 | $0 |
| $238,351 | 15 years | 3.5% | $1,703 | $68,328 | $116,643 |
In this case, the borrower would still make higher monthly payments, but not as much as in the higher interest rate scenario. Our borrowers will save more than $115,000 in total interest.
Bottom line: When is it a good idea to refinance to a 15-year mortgage?
Generally, we recommend refinancing to a 15-year loan if:
- You can get a lower interest rate than your current mortgage rate, ideally at least one-half to three-quarters of a percentage point lower.
- You will be living in your home for a long time.
- You can afford higher monthly payments.
- Your credit score or income has increased since you were first approved for the loan.
- You have 15 years (or more) left on your mortgage.
