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StockImageFactory.com/Shutterstock July 21, 2022 Checkmark Bankrate logo How is this page expert verified? At Bankrate, we take the accuracy of our content seriously. "Expert verified" means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Their reviews hold us accountable for publishing high-quality and trustworthy content. Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investment management and tax planning services to business owners, equity compensated executives, engineers, medical doctors and entertainers. Bankrate logo The Bankrate promise
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Many homeowners choose to from a 30-year fixed-rate mortgage to a fresh 30-year equivalent. While this can lower your monthly payment, it adds extra years to the total period of time you’ll be financing your home. That means you’ll pay more in total interest over the combined terms of your original loan and your refinanced loan than you might expect.
Should you refinance into a 15-year mortgage
It can be smart to pursue a . Refinancing from a 30-year, fixed-rate mortgage into a can help you pay down your loan sooner and save lots of dollars otherwise spent on interest. You’ll own your home outright and be free of mortgage debt much sooner than normal. Plus, mortgages with shorter terms often charge lower interest rates. Consequently, more of your monthly payments will be applied to the loan’s principal balance. A 15-year mortgage isn’t for everyone, however. Your monthly payment will likely rise because you’re compressing the repayment schedule over a shorter period. (To come out with a similar payment, you’d generally need to be in the last 10 or 12 years of a 30-year mortgage and be refinancing to a similar rate.) As a result, you’ll have less cushion in your monthly budget, particularly if you’re on a fixed income or in retirement. That extra money you’ll be spending could earn a greater rate of return invested elsewhere. You’ll also have less to on your taxes. Yet if you have sufficient cash flow, this strategy can be advantageous, despite the higher monthly payment. Good candidates for a 15-year refinance include homeowners who have lived in their home for several years and have a monthly budget and income that will enable the higher payment while also allowing wiggle room for other expenses, including repairs, maintenance and emergencies. Before refinancing into a 15-year mortgage, shop around carefully and from . Current 15-year refinance rates
At present, are about 5 percent. The rate has trended up substantially from the start of the year as the Federal Reserve has moved to tighten credit to fight inflation. Mortgage rates are not forecast to climb much higher and may even drop back.
Pros and cons of refinancing to a 15-year mortgage
Pros of refinancing to a 15-year mortgage
Interest rates for 15-year mortgages are often lower than those on 30-year mortgages. That lower rate, plus a shorter repayment period, can save you tens of thousands (or more) in interest. Paying off your mortgage at a faster pace allows you to build equity more quickly. You can tap that equity in the future via a , (HELOC) or . You might even reduce your monthly payments if the new rate is significantly lower than the existing rate. Cons of refinancing to a 15-year mortgage
You’ll need to pay for closing costs. If you can’t afford the closing costs of a 15-year refi upfront, you won’t save as much as you hope to. Tying all your money up in your home can be risky, especially if you don’t have an adequate . A higher payment can squeeze you monthly budget. If you refi to a 15-year loan and your payments go up, you’ll need to be able to afford that increase on top of other obligations month to month. A higher payment can make it harder for you to make more valuable investments. If more of your monthly budget is going to your mortgage, you might have less to contribute to a retirement plan, other investments and emergency savings, or paying down debt. Along with that, it can make it harder to qualify for other forms of credit like a car loan, since your debt-to-income (DTI) ratio would be higher. Refinancing takes time. The process to refinance involves lots of paperwork and waiting, which can be inconvenient. In addition, applying for a refinance is the same as applying for new credit, which temporarily lowers your . 15-year vs 30-year mortgage payment schedule
Before converting to a 15-year mortgage, carefully consider the impact on your finances. Evaluate your ability to pay monthly expenses and how the higher payment will affect your capacity to pay down debts and invest, versus staying pat with the remaining term on your existing 30-year mortgage. If your goal is merely to pay down your mortgage faster, you can accomplish this by simply on your existing mortgage loan. If you make enough extra payments over your loan term, you can easily shave time off your loan — even 15 years if you prepay aggressively. The catch with this strategy is that you might pay a higher interest rate on your current 30-year mortgage compared with a new 15-year loan. You’ll also have the hassle of managing, specifying and sending in extra payments that will need to be applied to your loan principal. Let’s examine how a lower and shorter loan term affect the principal amount of a mortgage. In the following scenario, a homeowner with a 30-year, $200,000 mortgage can pay it off in 15 years by adding $524 to each monthly payment. Interest rate Monthly principal and interest Total interest, life of the loan 30-year loan for $200,000, paid off in 30 years 5.50% $1,135 $209,128 30-year loan for $200,000, paid off in 15 years 5.50% $1,634 $94,150 15-year loan for $200,000, paid off in 15 years 5.0% $1,581 $84,737 To calculate the effect of making extra payments (each month, annually or one time), use Bankrate’s . Input the loan amount, term and interest rate, then click the “show amortization schedule” button, which reveals a section that lets you calculate the effect of extra payments. Sign up for a to crunch the numbers with recommended mortgage and .
Important considerations before you refinance into a 15-year mortgage
Can you afford the ? Is the money you ultimately save worth the higher payment every month, keeping in mind other goals you may have for the money? Does the refinance still make sense when accounting for the closing costs on the new loan? Is the hassle of the refinance worth the monetary benefit? Will refinancing and paying more each month deplete your savings and emergency funds? Instead of making higher monthly payments, could you than the mortgage interest rate you’ll pay? Do you have other outstanding higher-interest debt (including credit card debt) that you should pay down first? Do you plan to remain in your home for several years after refinancing so that you can at least recoup what you paid in refinance closing costs? How many years remain on your current home loan? If it’s less than 18 years, is refinancing to a new 15-year loan worth it? How secure is your job? What would happen if you became unemployed or earned less in the future? Is it smarter and easier to simply make accelerated payments on your current mortgage? How much longer will you be eligible to deduct your mortgage interest paid if you refinance to a 15-year loan? Is a 15-year refinance right for me
A 15-year refinance generally makes sense if you can lower your interest rate by at least 1 percentage point, can comfortably afford a higher monthly payment and will be able to recoup your in a reasonable period of time. Take into account how much you pay in interest today and how many years you have left on your current mortgage Bottom line
A number of factors are at play into a 15-year mortgage, including current interest rates, how long you plan to stay in your home, how many years of payments you have left, whether you want to prioritize other financial goals and what your tolerance is overall for the cost and process. If you can afford the higher monthly payment going from your current 30-year loan to a lower-rate, 15-year one, refinancing could save you significantly. SHARE: Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investment management and tax planning services to business owners, equity compensated executives, engineers, medical doctors and entertainers. Related Articles