When Does Refinancing into a 15-Year Mortgage Make Sense?
Points of Interest
As a homeowner, you may have been considering the idea of refinancing recently due to the onslaught of record-low interest rates caused by the pandemic. While most people refinance to a longer loan term, in some cases, refinancing your mortgage to a shorter-term like 15 years could end up saving you money.
You pay less in total interest when you opt for a shorter loan term, but you’ll be paying off your loan more quickly, which means higher monthly loan payments in return. Not everyone can afford to vastly increase the amount they’re paying on their mortgage loan each month, even if it’s going to save them thousands of dollars on interest over the long haul.
Is it worth refinancing to a 15-year mortgage? Ultimately, that answer will depend on your circumstances — but there are factors you can weigh to help you decide whether this type of loan is a good fit for you.
Benefits of refinancing your 30-year mortgage
Less interest overall
One of the main benefits of refinancing to a 15-year mortgage is that you will pay less in interest over the life of the loan. With a shorter loan term and higher monthly repayments, you will pay your loan off faster and the banks will typically offer you a better interest rate.
Build equity faster
Another benefit of refinancing to a 15-year mortgage is that you will be able to build equity on your home faster. Agreeing to pay the loan off sooner may come with higher monthly payments, but it will also chip away at the amount you owe on your principal a lot faster, too. This can end up significantly cutting down the time it takes to build equity in your home, and your monthly mortgage payments will start paying down the principal faster than they would with a longer loan term — in turn, building equity in your home.
While building equity and paying off your loan faster can only be a good thing, there is another benefit to building up your equity. You can borrow against your equity for home improvements, but you will first need a good amount of equity in your home, which can be built faster with a shorter loan term.
Avoid mortgage insurance
Typically, private mortgage insurance isn’t needed if you have at least 20% equity in your home. If you have that equity, you could refinance and eliminate this cost altogether. If you’re looking to build equity faster, refinancing to a shorter-term loan could be a great way to get there, which will help you save on your insurance, too.
Why should I refinance?
Refinancing your home can be a difficult decision to make. You need to first ask yourself whether you can feasibly pay a 30-year mortgage in 15 years. If you think you can handle the higher monthly repayments, the next thing to take a look at is what you will save overall if you refinance.
How much could you save with a 15-year mortgage? The answer is going to differ wildly depending on the situation. Still, to give you an idea of how much you could save, it’s worth looking at interest rate comparisons for 30- and 15-year mortgages at the current rates.
The average mortgage rate for a 30-year fixed mortgage is currently 3.110%, while a 15-year fixed mortgage currently averages about 2.640%. There is already a clear difference that can be seen just by comparing the two rates. However, if you took out a fixed-rate mortgage five years ago, you probably had an interest rate of about 3.85%, which is what it was, on average, in 2015.
That means if you are considering refinancing your mortgage, it may be worth taking advantage of today’s lower interest rates. Refinancing to another 30-year mortgage may be worthwhile to access better rates. However, refinancing to a 15-year mortgage with today’s interest rates could save you even more.
Based on the above example, if you took your loan out five years ago and refinanced to a 15-year mortgage today, you could save about 1.21% on your interest rate when compared to the rate five years ago. This can help you save thousands from the cost of your loan compared to the same 30-year mortgage agreement.
Of course, this all depends on your circumstances. You and your lender will need to take several things into consideration, such as the loan amount, your home equity, your credit score and the monthly costs. You are paying off your loan sooner, which means you will have higher monthly mortgage payments — and you need to be sure you can afford these. If you can afford the 15-year mortgage monthly payments, you could save a lot of money in interest.
Current mortgage rates
While mortgage rates are prone to fluctuation, it’s still worth looking at the average fixed interest rates for 30-year, 20-year and 15-year mortgages as well as jumbo rates, and FHA and VA rates that you will find at most lenders. Just be aware that these rates may differ depending on your circumstances and the lender’s decision.
30-year fixed-rate — 3.110%
30-year FHA rate — 2.820%
30-year VA rate — 2.790%
30-Year fixed jumbo rate — 3.170%
20-year fixed-rate — 3.150%
15-year fixed-rate — 2.640%
15-year fixed jumbo rate — 2.680%
Rates as of 8/14/2020
Again, it’s worth reiterating that before you refinance to a 15-year mortgage, you need to ask yourself whether you can afford to pay a 30-year mortgage in 15 years. Even with lower interest rates, this can be a difficult thing to do, so ensure you think carefully and do your research beforehand. Also, make sure that with any refinance that you consider the mortgage refinance rates in your overall costs.
The final word
Refinancing your home can be a tough decision, especially if you are tossing around the idea of switching to a shorter loan term. It’s important to make sure that you can afford the higher monthly payments while also comparing the average rates and lenders to see how much you can save.