If you own your home, there’s a good chance you bought it using a 30-year fixed-rate loan. But after a few years, your situation may have changed and you may have new financial goals – like paying off your mortgage sooner or saving on interest charges.
Refinancing to a 15-year mortgage can help you build home equity faster, pay off your loan sooner and potentially save you thousands of dollars on interest payments.
If you’re considering refinancing to a shorter loan term, there are plenty of reasons to do so, but cutting your loan down to a shorter term isn’t a decision you should take lightly. Let’s discuss the benefits and drawbacks of refinancing to a 15-year mortgage, and whether you should swap your current mortgage for a new 15-year loan.
How Does Refinancing to a 15-Year Mortgage Work?
Historically, the average interest rates for 15-year fixed-rate mortgages are roughly 0.5% lower than interest rates on 30-year fixed-rate mortgages.[1]
While a lower interest rate is a good incentive to refinance, the shorter repayment period for a 15-year mortgage can also increase your monthly payments.
To help you visualize what switching to a 15-year mortgage looks like, check out the difference between a 30-year mortgage compared to a 15-year term.
Keep in mind, if you refinance after 5 years with a 30-year mortgage, you will have only paid $16,148 toward the principal so your balance won’t have changed that much if you refinance to a 15-year mortgage.
| 30-Year Loan | 15-Year Refinance | |
|---|---|---|
| Current Loan Balance | $300,000 | $300,000 |
| Interest Rate | 7.5% | 7% |
| Monthly Payments | $2,098 | $2,696 |
| Total Interest Paid | $455,152 | $185,367 |
| Total Principal and Interest Paid | $755,152 | $485,367 |
In this situation, you’d need to pay an additional $598 a month toward your principal and interest, but you’ll have repaid your loan 10 years sooner and paid $269,785 less in interest over the life of the loan.
Should You Refinance Into a 15-Year Mortgage?
While refinancing may make sense if you can afford a higher monthly payment, it might not make sense, depending on your financial situation and goals. Before you refinance, ask yourself these questions.
Can you get a lower interest rate?
As a rule, refinancing a mortgage makes sense when you can get a loan with a lower interest rate.
Let’s say you originally bought your home when the best interest rate you could get was 7.5%. But after 5 years, interest rates have gone down and you’ve also improved your credit score. This could allow you to qualify for a 6.5% interest rate on a 30-year mortgage.
But why stop there? If you refinance to a 15-year loan, you could potentially save an additional 0.5% and only pay a 6% interest rate.
| 30-Year Loan | 15-Year Refinance | |
|---|---|---|
| Current Loan Balance | $300,000 | $300,000 |
| Interest Rate | 7.5% | 6% |
| Monthly Payments | $2,098 | $2,532 |
| Total Interest Paid | $455,152 | $155,683 |
| Total Principal and Interest Paid | $755,152 | $455,683 |
In this situation, your monthly payment would only go up by $434 a month and you’d pay $299,469 less in interest over the life of the loan.
What are your financial goals?
Let’s say you simply want to refinance your home so you can own it sooner. If your income has increased, and you can afford a higher monthly payment, you can pay a lot less for housing expenses later on. In addition, owning your home sooner could help you to retire or achieve greater financial independence earlier.
Can you afford the refinance expenses?
When comparing your current home loan to a 15-year refi, remember to add in the expenses associated with refinancing, like origination fees, title insurance, appraisal fees and more.
Before refinancing to a 15-year mortgage term, make sure you have a solid emergency fund in place.
Pros and Cons of Refinancing to a 15-Year Mortgage
If you’re thinking of refinancing to a 15-year mortgage, consider if the pros outweigh the cons.
✅Opportunity to lower the interest rate
Shorter mortgage terms have lower interest rates because mortgage lenders get their money back faster and can charge less interest due to decreased risk.
✅Pay less in interest
When you have a 15-year loan instead of a 30-year loan, you’ll pay significantly less interest overall since you’re borrowing the money for half the time at a lower interest rate.
✅Build equity in the home faster
The larger payments of a 15-year mortgage contribute to paying down your mortgage faster and increasing your equity in the home.
⛔Upfront closing costs
Refinancing can cost 3% – 6% of the loan amount, which you’ll usually have to pay for upfront.[2]
⛔Higher payments
A shorter mortgage loan term translates to a higher monthly payment. While you’re paying the lender less over the life of the loan, you’ll have to allocate more of your monthly budget toward mortgage payments.
⛔Missing other opportunities to use extra money
When you choose to refinance to a 15-year mortgage, you’re opting to invest more money in your house. Just remember it may come at the cost of using that money for other opportunities that might present themselves.
Are There Alternatives to a 15-Year Mortgage Refinance?
Sometimes, refinancing to a 15-year mortgage doesn’t make sense, even if your financial situation has greatly improved.
For example, if interest rates have increased by 1% or more since you took out your current mortgage, refinancing probably won’t be worth it. Instead, consider alternatives to refinancing to a shorter loan term, like paying off a 30-year mortgage in 15 years.
Even if you can’t pay off your mortgage in 15 years, you can cut down the length of your mortgage by consistently contributing more to your mortgage than the required monthly payments. This could be making an extra payment each year or making a larger one-time payment toward the principal loan amount.
Is Refinancing to a 15-Year Mortgage Right for You?
The choice to refinance to a 15-year mortgage is yours, but you can rely on your financial goals to guide your decision. Do the math to find out if the potential savings outweigh the closing costs and higher monthly payments of your new loan.
Can you afford to spend the extra money now to save in the long run? If you can’t decide, or simply want a second opinion, contact your financial advisor or accountant.
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Federal Reserve Bank of St. Louis. “FRED Graph.” Retrieved November 2022 from https://fred.stlouisfed.org/series/MORTGAGE30US#0
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The Federal Reserve Board. “A Consumer’s Guide to Mortgage Refinancings.” Retrieved November 2022 from https://www.federalreserve.gov/pubs/refinancings/