If your circ*mstances have changed, now may be a good time to refinance your home loan. But should you refinance to a 15-year mortgage? Consider the pros and cons before deciding.
The Pros
Other than owning your house free and clear sooner, there are additional benefits to a 15-year loan.
Less Interest Paid
You’ll be paying your mortgage for half the time you would with a 30-year mortgage. Because you aren’t paying interest for those additional years, you’ll save a lot of money on interest.
Lenders typically offer lower interest rates with shorter mortgage terms because they are taking on less risk. Because of this, a 15-year mortgage will tend to have a lower interest rate than a 30-year mortgage. This means you’ll have to pay less total interest over the life of the loan at a lower interest.
More Equity Sooner
You’ll also build equity in your home faster because you’re paying more toward your loan each month. Having equity in your home allows you to build long-term wealth. You’ll also be able to pocket more money in the event that you sell your home in the future or utilize your home equity in the event that you need cash.
Access To Equity Sooner
With more equity in your home, it may be easier to refinance again and access the money for needed repairs, debt consolidation or for other financial needs. You could qualify for home loans like a cash-out refinance or a home equity line of credit, known as a HELOC.
If you have an adjustable-rate mortgage, refinancing to a 15-year mortgage is also an opportunity to choose a fixed-rate mortgage. Having an interest rate that doesn’t fluctuate with the current market means you have more control over your finances.
The Cons
If you refinance to a 15-year mortgage, you could save money in the long run. However, if the upfront costs and higher monthly payments leave you cash-strapped for the foreseeable future, it may not be worth it – or possible for you right now. Let’s look at some refinancing cons for borrowers:
Upfront Costs
Future savings are great, but it costs money to refinance your loan. The cost to refinance includes an application fee, appraisal fee, title search, insurance and attorney fees, if necessary. On average, you should expect to pay around 2% – 6% of your loan amount. The exact closing costs will depend on your loan, lender and where you live.
Higher Monthly Payments
Refinancing to a 15-year mortgage shortens the amount of time you have to pay off your home That means your mortgage payments will be higher. Before you refinance to a 15-year mortgage, you’ll want to make sure your new mortgage payments fit comfortably in your budget. You may want to consider the 28% rule, which states that your mortgage payment should be no more than 28% of your gross monthly household income.
Missed Opportunity
Depending on your financial situation, the more money you put toward mortgage payments, the more financial opportunities you may miss elsewhere. That includes investing, saving for retirement, building an emergency fund or saving for a large future purchase.
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.
Moving into a longer-term loan: If you're already at least halfway through the loan term, it's unlikely you'll save money refinancing. You've already reached the point where more of your payment is going to loan principal than interest; refinancing now means you'll restart the clock and pay more toward interest again.
The 15-year mortgage has some advantages when compared to the 30-year, such as less overall interest paid, a lower interest rate, lower fees, and forced savings. There are, however, some disadvantages, such as higher monthly payments, less affordability, and less money going toward savings.
One major advantage of a 15-year mortgage is its lower interest rate. Compared to a 30-year loan, a 15-year mortgage can carry an interest rate that's about three-quarters of a percentage point lower. In fact, 15-year loans are some of the cheapest money you'll find.
You also build up equity in your home faster with a 15-year mortgage. Equity is the difference between the home's appraised value and how much you owe on it. Long-term, you can use that equity for a cash-out refinance or home equity loan (or line of credit), or to ditch mortgage insurance payments.
Key Takeaways. Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.
The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.
“A 15-year will save you money on interest and help you build equity faster than a 30-year mortgage. But, it comes with a substantially higher monthly payment than a 30-year, which could make money tight if you have a drop in income or unexpected expenses.”
A 15-year mortgage means larger monthly payments, but a lower rate and substantial savings on interest. A 30-year mortgage gives you a more affordable monthly payment, but expect higher borrowing costs overall. You can also take out an interest-only mortgage or pay your loan off early to maximize interest savings.
It suggests that homeowners who can afford substantial extra payments can pay off a 30-year mortgage in 15 years by making a weekly extra payment, equal to 10% of their monthly mortgage payment, toward the principal.
A major benefit of going with a 15-year mortgage is that you'll own your home free and clear in 15 years. You'll be free of mortgage payments after that. Many people look forward to being debt-free sooner.
Refinancing to a 15-year mortgage from a longer term can reduce your total loan cost, build home equity faster and pay off your loan quicker. However, with higher monthly payments than longer terms, it might strain your budget over time.
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.
If you originally got a 15-year mortgage but find the payments challenging, refinancing to a 30-year loan can lower your payments by as much as several hundred dollars each month. Conversely, if you have a 30-year mortgage, a 15-year term can help you build equity much faster.
Any time for a simple or rate-and-term refinance; after seven months for a streamlined refinance; after 12 months for a cash-out refinance (can vary by lender). You must have made on-time payments for the past six months; 12 months for a cash-out refinance.
To calculate the value of refinancing your home, compare the monthly payment of your current loan to the proposed payment on the new loan. Then use an amortization schedule to compare the principal balance on your proposed loan after making the same number of payments you've currently made on your existing loan.
Bottom line. A mortgage refinance can be an excellent way to save money. But if the rates are too high — or you've been turned down — it might not be something you can take advantage of. Explore other ways to bring down your mortgage payment and see which makes the most sense for your situation.
There is no legal limit on how often you can refinance your home. However, most lenders require a waiting period of six months between refinances. Keep in mind that refinancing involves closing costs, so it's essential to ensure that the benefits of refinancing outweigh the expenses.
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