Why You Should Refinance To A 15
If youre looking to speed up your mortgage payoff timeline, it may make sense to apply for a 15-year refinance, said Michael Becker, a branch manager with Sierra Pacific Mortgage in Lutherville, Md.
Revisiting our example above, it could also make sense to refinance into a 15-year mortgage if you can get a lower mortgage rate and reduce your interest costs. Becker said hes seen some instances when refinance rates on 15-year fixed-rate mortgages are nearly a full percentage point lower than 30-year loans.
Even with these benefits, the main drawback to consider is a higher monthly mortgage payment. Exactly how much your payments increase depends on how long youve had your existing mortgage, Becker said.
For example, if youre in a 30-year mortgage and youve been in it for 10 years and you have a high rate, lets say 5% and youre dropping to 3% 3.25%, you might not see an increase in your monthly payment, he said. Its all about interest savings and getting your house paid off.
Take the below example of a borrower whos considering a 15-year refinance. The borrower first took out a $200,000 mortgage five years ago with a 30-year term and a 5% interest rate. Today, the borrower qualifies for a 15-year loan with a 3% rate. Using LendingTrees mortgage refinance calculator, lets break down the numbers:
Refinance With A Shorter
A shorter term on the mortgage means it goes away sooner, but at the cost of a much higher monthly payment and perhaps some out of pocket closing costs. Examine the loan closely.
The monthly payment on a 30-year, $200,000 mortgage at 2.5% would be $790 a month.
The monthly payment on a 15-year, $200,000 mortgage at 2.25 % would be $1,310.
Thats another $520 a month to finish paying off your mortgage 15 years sooner.
|30 Years of Payments|
|*For a $200k mortgage|
The bottom line on this decision is the bottom line: Can you afford the higher monthly payment of a 15-year loan, or are you better off contributing extra each month when you can to a 30-year payment?
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Are You In Need Of More Room For Monthly Cash Flow
Refinancing can change your monthly payment and make it either higher or lower, depending on the terms you choose. If youre in desperate need of some breathing room in your monthly budget, it could make sense to refinance and pay a lower monthly rate, so long as you use that freed up cash towards your goals.
A huge mistake would be to refinance, lower your payment, and not have a clear plan of what youll be doing with those new freed up dollars each month.
Find The Best Refinance Rates
To find the best refinance rates, youll have to do some work, but it wont take much time. Look at banks, credit unions and online comparison sites. You also can work with a mortgage broker if you want someone to do the legwork for you and potentially get you access to lenders you wouldnt find on your ownlenders that might offer you better terms.
Submit three to five applications to secure formal loan estimates. The government requires the loan estimate to show your estimated interest rate, monthly payment and closing costs on a standard form that makes it easy to compare information across lenders.
On page 3 of the loan estimate, youll see the annual percentage rate, and on page 1, youll see the interest rate. When youre buying a car, it usually makes sense to pick the loan with the lowest APR, because APR includes a loans fees.
With mortgages, its different. The APR assumes that you will keep the loan for its full term. As weve already seen, that doesnt usually happen with home loans. You might be better off with a loan that has a higher APR and a higher monthly payment but no fees.
Instead of putting cash toward closing costs, you could keep that money in your emergency fund or use it to pay down debt with a higher interest rate than your mortgage.
Another problem is that if youre comparing the APRs on a 30-year and a 15-year loan, the 15-year loan might have the higher APR despite being much less expensive in the long run.
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Advantages Of Refinancing To Another 30
An estimated 16.7 million Americans with 30-year mortgages could refinance and save an average $303 a month, the mortgage data firm Black Knight said in early February.
These refi candidates are sitting on loans with rates at least three-quarters of 1 percentage point higher than rates currently available on 30-year fixed-rate mortgages. Those are averaging 2.81% in the latest weekly survey from mortgage giant Freddie Mac, and not too far above January’s record low of 2.65%.
“The cost to borrow has never been cheaper for homeowners,” says Grant Moon, the founder and CEO of the real estate technology company Home Captain.
At the start of 2020, the typical rate for a 30-year loan was 3.72%.
Fifteen-year fixed-rate mortgages come with even lower rates than 30-year loans. Rates on the shorter-term loans are averaging 2.21%, Freddie Mac says.
But Moon says you’re better off choosing a 30-year mortgage for a refinance in the current environment, because 15-year loans come with much stiffer monthly payments.
“Your payment would likely go up, and with uncertainty around the economy with millions of people receiving unemployment benefits, it could be a dangerous proposition if a borrower were to lose their job and be stuck with a higher payment amount,” he says.
A $250,000, 30-year fixed-rate mortgage at 2.81% has a monthly payment of $1,029. The same size mortgage for 15 years at 2.21% has a much steeper monthly payment: about $1,633.
When A Refinance Can Be A Good Idea
The primary attraction to a shorter mortgage term is paying off your home loan sooner. This is typically at a lower interest rate. This can help you increase your home equity faster. It can also mean paying thousands of dollars less in interest over the life of the loan. Therefore, refinancing to a shorter-term loan makes the most sense when interest rates are falling.
Its also a particularly good idea for homeowners who can easily afford to increase their existing monthly mortgage payments. In addition, homeowners whose home values have increased since they financed their original mortgage will be more likely to qualify for a 15-year loan, since they will have a lower loan-to-value ratio how their homes current value compares with their current loan balance.
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Review Your Credit Report And Check Your Credit Score
To figure out your best option, youll need to check your credit report. Your credit score will be based on the information contained in this report.
You can request a report from any one of the three credit reporting agencies Experian, Equifax and Transunion. Typically you would be able to obtain one free credit report from each of the agencies per year, but as part of the measures put in place to protect consumers during the pandemic, you can request a free credit report on a weekly basis until April 2022.
After reviewing your report, youll want to check your credit score. Sites like Credit Karma will provide your score for free. Many credit card providers now offer access to your score as well.
Who Should Consider Refinancing Into A 15
If you’re planning on retiring within the next 15-years, this shorter-term mortgage can make your retirement years much easier. Having a more carefree retirement is a goal of many homeowners. And when you don’t have a mortgage, living on a limited income becomes much more comfortable.
Consolidating debt could be another reason to get a 15-year mortgage. If you’re paying high interest on credit cards and loans, doing a cash-out refinance to pay off debt can lower your overall budget even though your mortgage payment is higher.
Some homeowners that want more structure and discipline in their budget opt for a shorter term. They consider this forced savings. And once they get used to the higher payment, they’re glad they chose a shorter term.
What about a 15-year for investment property or second home? You can have the same advantages of refinancing your primary residence and then some. For example, paying off an investment property early can mean better cash flow which is always good for landlords.
It’s always a smart idea to check out all of your refinancing options. And looking into a 15-year mortgage is an excellent start.
To learn more about PenFed loans or what loan is right for you:
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Dont Forget About Retirement
Hows your retirement fund? Check on this and see if youre currently contributing enough. Instead of refinancing to a 15-year mortgage, you may be better off putting more money toward a 401 plan or an IRA account.
You also want to make sure youre maximizing your tax benefits in these and other types of programs, like health savings accounts and 529 college savings accounts. Compared to these plans, paying down a low-rate, potentially tax-deductible debt like a mortgage is a low financial priority.
Will You Save Enough In Interest
If you have decent credit and a low debt ratio, chances are that you will secure a low interest rate on your 15-year term. This in combination with the shorter term will help you save a great deal on interest charges.
For example, lets look at a $200,000 at 4% on a 30-year loan and the same loan at 3.5% on a 15-year term.
- 30-year payment $955 with total interest paid of $143,739
- 15-year payment $1,430 with total interest paid of $57,357
Thats a savings of more than $86,382 over the life of the loan! Even if you got the same interest rate of 4%, youd still save $77,400. This isnt the case for everyone, though. Dont just assume youll save money. Do the calculations. Ask your lender what the interest costs are over the life of the loan and compare it to what you would pay on your current loan.
Remember, refinancing costs money. You arent going to get a 15-year loan free of charge. Youll pay origination fees, processing fees, title fees, appraisal fees, and more. The costs could add up to several thousand dollars or more, so youll need to keep that in mind.
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Refinance Without Extending Your Loan
As a homeowner, your mortgage is your choice. Theres no rule that says you have to use a 30year fixedrate mortgage.
And if you do choose a 30year mortgage, youre not obligated to keep it the full term.
Youre free to refinance or use other strategies to shorten your repayment period and save a lot on interest payments.
That said, lenders also wont customize the term to suit the borrower. So you may not find a new mortgage with the same end date as your prior mortgage.
For example, lets say you locked in a 30year loan that is now 5 ½ years old and youd like to refinance for a better rate. You cant get a new loan for 24 ½ years to line up with your original 30 year loan. Due to this fact, youll either have to extend your loan term or switch to a new, shorter term when you refinance.
Luckily, there are plenty of loan terms available under 30 years, so its usually possible to refinance without starting completely over.
Factors To Consider Before Refinancing
Even if you fit into one of the scenarios above, watch out for these issues before refinancing your home loan:
- Will you have room in your budget for the upfront costs? A mortgage refinance has many of the same upfront costs as a standard mortgage. As mentioned earlier, these costs can fall somewhere in the range of 2% to 6% of the loan amount. That means even if youre able to secure a lower mortgage rate, you need to be sure your long-term savings offset the upfront expense.
- Will you have a prepayment penalty? Your mortgage may also come with a prepayment penalty, in which case youd be charged a fee for paying off your mortgage early. Some mortgages also come with recapture rules, which require you to reimburse the lender for any money theyve paid on your behalf, particularly for no-cost loans, if you pay the loan off ahead of schedule.
- Will you save or spend more over time? Its crucial to consider the overall cost of your new mortgage. For example, if you extend your loan term by refinancing from a 15-year into a 30-year mortgage, youll lower your monthly payments but will likely pay thousands more in interest over the life of the loan. Its also possible that refinancing could make your home equity grow more slowly, which may net you less money when you sell your home or limit how much home equity you can borrow later.
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Are Refinance Rates Higher Than Purchase Rates
Refinance rates are generally higher than rates for new mortgages to buy a house. Here are some factors that influence the higher rates:
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Think it might be the right time to refinance? You can explore your mortgage refinance options in minutes by visiting Credible to compare rates and lenders. Check out Credible and get prequalified today.
here. Actual rates may vary.
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As a Credible authority on mortgages and personal finance, Chris Jennings has covered topics that include mortgage loans, mortgage refinancing, and more. Hes been an editor and editorial assistant in the online personal finance space for four years. His work has been featured by MSN, AOL, Yahoo Finance, and more.
Calculate Your Mortgage Refinancing Savings
To calculate your monthly savings from refinancing, use a mortgage calculator to enter these numbers and get your new monthly payment:
- Amount to refinance
- New interest rate
- New loan term
Compare your new monthly payment to your old monthly payment. The table below shows how grabbing a lower interest rate could save you $204 per month, or $2,448 per year.
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Should I Refinance To A 15
Mortgage rates are at all-time lows once again. According to recent data from Black Knight, nearly 14 million homeowners would benefit from a refinance. While many folks will opt for another 30-year mortgage, some will consider a 15-year mortgage.
Shortening your loan term can be one of the best financial decisions you ever make. But its not the right move for everyone, and you might end up overestimating your ability to repay the loan.
Heres everything you should know before refinancing into a 15-year mortgage.
Extra Money To Invest Elsewhere
Depending on your level of investing savvy and confidence in your investing abilities, you may believe that you can earn more money investing than you’re paying in interest. For example, if you believe you can earn a 7 percent rate of return on your investments and you can refinance down to a 4 percent interest rate, the 3 percent spread represents profit for you if you use the money you aren’t using to pay the mortgage for investments. In addition, your mortgage interest and home equity interest is tax-deductible, so Uncle Sam may end up giving you a tax break on the interest you pay on your mortgage.
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Why Would Refinancing Be A Bad Idea
Refinancing is a bad idea if it doesnt represent some sort of gain, be it in the form of lower monthly payments or saving on interest by reducing the term of your loan. If the interest rate being offered isnt at least 0.5% lower than your current rate, its probably not worth the cost of a refi. Another reason not to refinance is if you plan on selling the house before you reach your breakeven point or if the new monthly payment is more than you can comfortably afford.