There are many reasons to opt for a 30-year mortgage when buying a home.
For example, spreading your payments out over 30 years — as opposed to 15 or 20 — lowers your monthly payment. This allows you to buy “more home” and have a manageable payment.
However, as time goes by, you may realize that there are many reasons to refinance your mortgage. And if that happens, you could soon find yourself considering a 15-year mortgage.
Let’s talk about why you would want to consider a refinance from a 30 year to a 15 year mortgage.
Why You Should Refinance to a 15-year Mortgage
The primary reason to refinance to a 15-year mortgage is to lower your interest rate.
Not only does this lower your monthly payment, but it also reduces the amount of money you’ll pay in interest over the remainder of your loan.
Other reasons to refinance from a 30-year to 15-year mortgage include:
- The time it takes to pay off your mortgage will be quicker
- More of your payments will go towards the principal of your loan
- You’ll build equity quicker
No two homeowners are dealing with the exact same situation, but these reasons for refinancing a mortgage pertain to the majority of them.
Who Should Refinance to a 15-year Mortgage?
Anyone who meets the eligibility requirements of their lender can refinance from a 30 year to a 15 year mortgage. But just because you qualify doesn’t mean it’s a good idea to take action.
As a general rule of thumb, the best candidates for this type of refinance are those who meet the following criteria.
- A homeowner who is staying put: There are closing costs associated with refinancing your mortgage, so you don’t want to move shortly after completing the process. It’s best to stay in your home for a minimum of five to seven years so you can recoup your closing costs.
- Homeowners who can afford a higher monthly payment: Despite a lower interest rate, you’re shaving 15 years off of your term. And for that reason, you should expect a higher monthly payment.
- Those with the opportunity to lower an interest rate: So, if your current mortgage rate is four percent, you should only refinance to 15 years if you can secure a rate of three percent or lower.
- A homeowner that still has a while left on their loan term: For instance, if you only have five years left on an original 30-year mortgage, there’s no point in refinancing. You’re going to spend more on closing costs than you would save with a lower interest rate.
Differences in 30 and 15 year Mortgage Payments
Before you make a final decision, you need to know the differences in monthly payments between a 30 and 15 year mortgage.
To better understand the impact of refinancing, let’s take a look at an example.
With a mortgage of $250,000 and an interest rate of four percent, a 30 year mortgage would have a monthly payment of $1,193.54.
If you move to a 15-year mortgage with a three percent interest rate, the monthly payment jumps to $1,726.45.
If you only look at those numbers, you’d assume that a 30-year mortgage is the right choice. But you don’t want to stop there. You need to see how much you’d save in interest.
Here’s the interest over the first five years:
- 30-year mortgage: $47,731.08
- 15-year mortgage: $32,381.86
And if that’s not enough, here’s the interest over the life of the loan:
- 30-year mortgage: $179,673.77
- 15-year mortgage: $60,761.74
Now, what do you think? Does it still make sense to stick with a 30-year mortgage?
Even though your monthly payment is much higher with a 15 year mortgage, you’ll save tens of thousands of dollars over the long run. That’s something to strongly think about.
Questions to Ask Before Refinancing
By now, you can formulate an opinion on whether refinancing your 30-year mortgage into a 15-year mortgage makes sense. With that, you’re likely to have questions. The following are common questions to answer before refinancing.
- Can you afford a higher monthly payment based on your current budget?
- Is the money you save in the long run worth the higher monthly payment? How would you use this money if it wasn’t going toward your mortgage?
- Do you have outstanding debts that require your attention?
- How long do you plan to remain in your home after refinancing to a 15-year mortgage?
- How secure is your job? Are you able to keep up with higher payments if you go through a spell of unemployment?
- Does it make more sense to pay extra on a 30-year mortgage?
- Should you ever refinance your mortgage when rates rise?
- Will refinancing to 15 years impact your tax situation, such as how long you’re able to deduct mortgage interest?
If you don’t answer these questions — among others — before refinancing to a 15-year mortgage, you’re taking a big financial risk that could backfire down the road. It’s critical to answer these questions based on your current circumstances and goals. And if you need any help, contact your lender for a more thorough explanation and guidance.
There are many reasons to refinance your 30-year mortgage into a 15-year mortgage, but it’s a big decision that requires your full attention.
When it comes to your finances — especially the home in which you live — you don’t want to make any mistakes.
If you’re ready to take the next step in the process, My Perfect Mortgage is more than happy to show you the way. We can give you the tools and connect you with the right resources to guide you.
Once you get started, you’ll feel confident in your ability to make an informed decision.