January 30th, 2020 11:46 AM by Jackie A. Graves
In the second half of 2019, mortgage rates fell to their lowest
level in nearly three years. And they’re expected to stay down in 2020.
With interest rates this low, many homeowners are
considering refinancing their 30-year
mortgage to a 15-year term.
Lower rates make a 15-year refinance affordable for many,
helping counter the higher payment that comes with a shorter loan term.
A 15-year mortgage also means you’ll pay off your house sooner,
and pay thousands less in interest over the life of the loan.
Is refinancing to a shorter loan term best for you? Find out
In this article:
15-year vs. 30-year loans
15-year refinance savings
Refinance or pay off
The most popular mortgage program in the U.S. is the 30-year mortgage.
In fact, when buying a home, 85% of homebuyers choose 30-year fixed-rate
The reason most homeowners choose a 30-year mortgage over a
15-year is it has the lowest monthly payment. But there are pros and cons to
Lower interest rate
Less interest paid over life of loan
Lower monthly payment
Bigger home buying budget
Higher monthly payment
Smaller home buying budget
Higher interest rate
More interest paid over life of loan
To see how those pros and cons play out in real life, take a
look at an example.
Here’s how interest and monthly payments might add up for a
15-year loan versus a 30-year loan on the same home:
Monthly P&I payment
Total interest over life of loan
Most people assume that because you’ll be paying a 30-year
mortgage for twice as long as a 15-year mortgage, you’ll pay twice as much
interest over the term of the loan.
But the reality is that higher interest, paid over a longer
term, compounds more quickly than that.
In the example above, you’d pay about $92,000 more in interest
on a 30-year loan than you would on a 15-year loan. That’s almost 150% more
And remember, those numbers are for a $200,000 loan — meaning
the additional interest you pay for a 30-year versus 15-year mortgage is almost
half the total loan amount.
So, just how much of that extra interest could you save by
Refinancing into a 15-year mortgage can shorten your loan term
and your overall cost considerably.
Say you bought your house with a 30-year mortgage. After three
years you refinance into a 15-year loan. Ultimately, you’ll pay off the house
in just 18 years (as long as you don’t refinance again).
You’ll also save a lot in interest, even though your monthly
payment will be higher.
See how a refinance after three years cuts your overall cost, using
the same example as above:
Continue with 30-year loan after 3 years
15-year refinance after 3 years
>> Related: Refinance calculator
— calculate your own savings
There are other benefits to a 15-year refinance, too.
You can build equity faster, and potentially be debt-free much
quicker than you otherwise would.
But it’s important to remember the big drawback to a 15-year
refinance: Your monthly payment will be a lot higher than it was before.
If you make more money now than you did when you got the loan,
or if you have fewer debts, a higher mortgage payment might be just fine.
But for some, having to spend a bigger chunk of their monthly
income on housing just won’t make financial sense.
But you have other options for paying off your mortgage early,
When considering a 15-year refinance, homeowners should
carefully consider the impact a higher payment may have on their finances.
Evaluate your budget and how the higher payment could affect
your ability to pay other monthly debts, as well as your capacity to invest.
Remember: if you make a payment for less than the amount owed,
it’s a late payment. That can wreck your credit or even put your home in
jeopardy. Your risk is much lower with a 30-year loan.
And don’t forget — refinancing comes with closing costs just
like your original mortgage did. You’ll want to be sure the long-term savings
of a refinance outweigh the upfront costs.
With the required payment for a 30-year mortgage being lower
than a 15-year, you have a little more flexibility within your monthly budget.
That can come in handy if your income changes, if you lose a
job, or have financial emergencies to cover.
And you still have the option to pay off your loan faster.
If your goal is to be debt-free, but you can’t commit to a
15-year refinance, you might consider simply making extra payments on your
If your goal is to be debt-free, but you
can’t commit to a 15-year refinance, you might consider simply making extra
payments on your 30-year loan.
By making extra payments of just $100 per month, you could cut
five years off your 30-year.
Or, if you have a lot of extra cash, you could pay more each
month, say, $500 — and effectively cut your loan down to 15 years and save
$82,200 in interest. Following is what you’d pay on a new $200,000 loan.
30-year loan paid off in 30 years
30-year loan paid off in 15 years
15-year loan paid off in 15 years
Monthly P&I Payment
The catch with this strategy is that you still pay more than if
you were to refinance to a 15-year loan. This is due to paying a slightly
higher interest rate on the 30-year mortgage as compared to the 15-year.
But, that extra flexibility with monthly payments is invaluable
You can always choose to skip adding the extra $500 payment.
This could be important if you experience a loss of income or higher expenses
at any time in the future.
According to Freddie Mac, mortgage rates fell to their lowest
level in thirteen weeks.
Regardless of the loan term, interest rates are low. A refinance
could save you a lot of money.
Get quotes from a few different lenders to compare interest
rates and loan terms. Then decide which option is best for you.
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