Can You Refinance Into A Shorter Term
If you have 20 years left on your mortgage and you refinance into a new 30-year mortgage, you may not save money over the long run .
However, if you can afford to refinance that 20-year mortgage into a 15-year mortgage, the combination of a lower interest rate and a shorter term will substantially reduce the total amount of interest youll pay before you own the house free and clear.
Negatively impacting your long-term net worth
Refinance Rates For April 21 202: Rates Trend Higher
Several important refinance rates kept trending upward today.
A few closely followed mortgage refinance rates made gains today. Both 15-year fixed and 30-year fixed refinances saw their mean rates trend upward. At the same time, average rates for 10-year fixed refinances also moved up.
Homeowners can expect to see refinance rates rise over the course of this year. Although rates are higher now than at the start of the pandemic, multiple economic factors are likely to keep pushing rates up. Refinance rates also fluctuate daily, but if you’re looking to shave dollars and interest off of your current monthly mortgage payments, these could be the lowest rates this year. Make sure to think about your goals and circumstances, and compare offers to find a lender who can meet your needs.
Questions To Ask Before You Switch To A 15
Here are some questions to ask before you sign on the dotted line:
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When Should I Consider A 15
15-year refinance loans typically have a lower rate than a 30-year loan. A 15-year mortgage refinance can be a good way to pay off your mortgage sooner and save on interest. So the best time to consider refinancing is when rates are low enough that your interest savings will outweigh the upfront closing costs associated with a refinance loan.
For homeowners with more than 15 years left on their mortgage, a 15-year loan is a great way to potentially secure a lower rate without adding years to your repayment schedule.
Because the monthly payments on a 15-year mortgage are higher, refinancing to a shorter-term loan makes the most sense if your income has increased since purchasing your home.
So before you commit to bigger monthly payments make sure your current financial situation can support them.
Can I Refinance To A 15
Whether you have a 30-year mortgage, a 20-year mortgage, or an existing 15-year mortgage, refinancing to a 15-year is certainly possible. To get approved to refinance, you’ll need to meet a few criteria:
- Have a reasonable debt-to-income ratio
- Have a steady job or source of income
As long as you meet these requirements, a lender should let you refinance to whatever loan term you want. But don’t assume you’ll qualify for a refinance off the bat just because you’re an existing borrower.
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How Long Do You Plan To Keep The Mortgage
As when you purchased your home, you will have to pay closing costs on your refinance. If youre planning on selling your house in a few years, you may barely break even by refinancing. How come?
If the monthly savings for the remainder of your mortgage are not greater than the closing costs associated with the refinancing, youll lose out. If you roll the closing costs into your mortgage instead of paying them up front, youre paying interest on them, so youll need to factor this expense into your break-even calculation.
Refinow And Refi Possible
On June 5, 2021, Fannie Mae began to offer low-income mortgage holders a new refinance option through a program called RefiNow, meant to reduce their monthly payments and interest rates. Beginning in late August 2021, Freddie Mac will begin offering the exact same program, which is called Refi Possible. In order to be eligible, homeowners must be earning at or below 80% of their area median income .
Fannie Mae’s RefiNow program offers several benefits for homeowners. First, it requires a reduction in the homeowners interest rate by a minimum of 50 basis points and a savings of at least $50 in the homeowners monthly mortgage payment. Second, Fannie Mae will provide a $500 credit to the lender at the time the loan is purchased if an appraisal was obtained for the transaction, and this credit must be passed on from the lender to the homeowner.
In order to qualify for Fannie Mae’s RefiNow program, a homeowner must meet these qualifications:
- Be in a possession of a Fannie Mae-backed mortgage secured by a 1-unit, principal residence.
- Have a current income at or below 80% of the AMI
- Never missed a mortgage payment in the past six months and no more than one missed mortgage payment in the past 12 months.
- Be in possession of a mortgage with a loan-to-value ratio up to 97%, a debt-to-income ratio of 65% or less, and a minimum 620 FICO score.
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Us Department Of Veterans Affairs Streamline
This program, also known as an interest rate reduction refinance loan , is similar to an FHA streamline refinance. You must already have a Veterans Administration loan, and the refinance must result in a lower interest rate unless you are refinancing from an adjustable-rate mortgage to a fixed-rate mortgage. The lender may require an appraisal and a credit report, though the VA does not require these.
Notably, the VA and the Consumer Financial Protection Bureau issued a warning order in November 2017 that service members and veterans had been receiving several unsolicited offers with misleading information about these loans. Check with the VA before acting on any offer of a VA IRRRL.
With both the VA streamline and the FHA streamline, it is possible to pay few to no closing costs upfront. However, these costs will either be rolled into the mortgage, or youll pay a higher interest rate in exchange for not paying closing costs. So while you wont be out any cash upfront, you will still pay for the refinance over the long run.
How Much Will It Cost To Complete The Refinancing
Depending on your lender and your loan terms, you may pay as little as a few hundred dollars or as much as 2% to 3% of the new loan value to complete a refinancing. If its going to cost you $3,000 to complete the refinance and it will take four years to recoup that money, it may not make sense for you.
Alternatively, if you can refinance and pay only $1,000, and have no plans to sell anytime soon, its very likely worth paying that $1,000 to save over time. In addition, some lenders allow you to roll your closing costs into the amount of the loan, so you dont have to come up with money out of pocket for closing costs.
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The Advantages Of Refinancing Into A 15
For borrowers who can manage the higher payments, 15-year mortgage refinances have benefits, says Richard Pisnoy, a principal with Silver Fin Capital, a mortgage broker in Great Neck, New York.
“Not only will they be paying a lower interest rate on the loan, but they will reduce the number of years on the loan, thus saving an enormous amount of interest,” Pisnoy says.
With the 15-year mortgage in the earlier example in the amount of $250,000 and at 2.59% interest the interest costs would be about $52,000 over the life of the loan.
The 30-year mortgage in the same amount at 3.13% interest would have much higher lifetime interest costs: about $136,000.
Suze Orman says consider the interest burden for a hypothetical homeowner who has been paying on a 30-year fixed-rate mortgage for 14 years.
“Now you decide to refinance and you take out a fresh 30-year mortgage,” she writes, on her blog. “Sure, the new mortgage is at a lower interest rate, but you just extended your mortgage-payment on this home to 44 years! Thats 44 years of interest payments.”
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How Much Money Can I Save
There is no quick answer to this question, as there are several variables at play in each refinance. To provide a basic idea of what a shorter-term home loan can mean for your finances, lets take a look at how the numbers would work out in a 15-year refinance on a conventional home loan.
As mentioned, a 15-year loan generally carries a lower interest rate than a 30-year loan. If national interest rates are falling when you refinance, and/or your credit has improved since you bought your home, your interest rate can be even lower.
Make An Extra Mortgage Payment Every Year
Throw all or a portion of new-found money like a year-end bonus or inheritance at the mortgage. The earlier into the loan you do this, the more of an impact it will have. In a typical 30-year mortgage, about half the total interest you pay will accumulate in the first 10 years of your loan. That is because your interest rate is calculated against the very high principle amount you owe in the early years.
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Youll Likely Snag A Lower Interest Rate
Lenders adjust their mortgage rates based on the riskiness of the loan. While there are many factors they use to make this calculation, if youre paying the principal back faster, this is typically seen as a less risky investment for the lender, and therefore youll be charged a lower interest rate, says Mescher.
A shorter term also means the lender is tying up its money for a shorter length of time. Since most 15-year mortgages are at a fixed rate that doesnt change over the entire length of the loan, the lender is taking a risk that market interest rates wont go up significantly in the intervening years. A 15-year mortgage is less vulnerable to this dilemma than a 30-year mortgage.
More On How To Maximize Total Wealth
The decision of whether to refinance your mortgage is multidimensional, especially if you account for maximizing total wealth. We believe it can be an oversimplification to focus on only one factor of savings . This approach doesnt take into account other variables in your financial picture that affect your total wealth over the course of the loan. Here are 6 other variables to account for when calculating total wealth:
1) Tax deduction of your closing costs and mortgage interestIn the tool, were assuming a current and future marginal tax rate of 28%. This is used to estimate the amount by which you can reduce your taxable income over the loan term.
2) Opportunity cost of investing your moneyIf you lower your monthly mortgage payment, you might choose to invest the difference in bonds or stocks. This can add up to a lot of money in the long run! We assume a post-tax investment yield of 3.5%. If you keep most of your savings in a bank account, decrease this to 0%. If you invest most of your savings in the stock market, increase it to 6%.
3) Cash flowIn the tool, we factor in one-time, out-of-pocket closing costs as well as the adjustment to your current monthly payment. Both of these affect your cash flow. If it will be difficult to absorb these adjustments, it may not make sense to refinance your mortgage even though it might save you money in the long run.
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Can You Pay Off Your Mortgage Early
In most cases, homeowners can pay off their mortgage early, provided you follow certain ground rules and make sure the terms of your loan.
The first step is to recognize how your payment works. Early in a 30-year loan, the bulk of the payment goes toward loan interest. As the loan is closer to completion, the bulk goes toward the amount you borrowed, or the principal. But if the principal is lowered through extra early payments, the interest paid also is lowered. Paying down principal in the long run will reduce the total interest paid on the loan.
The more the principal is paid, the more the homeowner builds equity in the home. To easily figure the equity, calculate a fair price you feel the home is worth then subtract the loan balance. If a home could be sold for $300,000 and you have $150,000 left on the loan, you have $150,000 in equity.
When considering paying the mortgage early, be sure you know the answer to a question that many, especially first-time homebuyers, often do not consider: Is there a prepayment penalty on your loan? Many lenders do not have this penalty, but those that do will charge for making early payments. If you have any uncertainty, call your lender to ask specifically about prepayment penalty.
Once that question is answered, be sure to tell your lender if and when you make extra payments that you want that money applied to principal.
The Advantages Of Refinancing Into Another 30
If you swap out an older 30-year fixed-rate mortgage for a brand-new one, you’re likely to score a much lower mortgage rate and slash your monthly housing costs.
In late June, 30-year mortgage rates plunged to an all-time-low average of 3.13%, according to mortgage company Freddie Mac. One year ago, the average was 3.73%, and two years ago it was 4.55%.
“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.
Fifteen-year fixed-rate mortgages come with even lower rates than 30-year loans: currently an average 2.59%, down from 3.16% a year ago and 4.04% at this time in 2018.
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 30 million people , it could be a dangerous proposition if a borrower were to lose their job and be stuck with a higher payment amount,” he says.
Use a mortgage calculator and you’ll see that a $250,000, 30-year fixed-rate mortgage at 3.13% has a monthly payment of about $1,071. The same size mortgage for 15 years at 2.59% has a steeper monthly payment: close to $1,700.
Try the mortgage calculator below to see what your payment would be with one of today’s rock-bottom rates.
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Disadvantages Of A 15year Refinance: Higher Monthly Payments
Depending on your financial situation, refinancing into a 15year mortgage could result in the same or even lower principal and interest payments. Your lower balance and better interest rate could offset the reduced loan term.
In many cases, though, the shorter loan term means your monthly mortgage payments will be higher despite a lower interest rate. Even so, a 15year refinance could make sense financially.
If a 15year refinance doesnt fit your budget, you can always consider refinancing into a 20 or 30year loan.
You could still make higher monthly payments to eliminate your mortgage faster and reduce the amount of interest you pay. This method provides flexibility that may be a better financial option for some homeowners.
The Bottom Line: Affording Less Debt Is Best
Refinancing to a 15-year mortgage can allow you to own your home free and clear faster and save money on interest. However, there are upfront costs and higher monthly mortgage payments that come with it.
If youre in a good financial place and youre motivated to pay off your loan, it may be a good option for you. If youre ready, you can get started on your refinance with Rocket Mortgage® today.
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