When Rates Are Low, Many Homeowners Benefit From a 15-Year Refinancing
The second half of 2019 had the lowest mortgage rates in nearly three years. And they are anticipated to remain low in 2020.
With interest rates as low as they are, many homeowners are contemplating refinancing their 30-year mortgage to a 15-year term.
Lower interest rates make a 15-year refinancing reasonable for many borrowers, offsetting the higher monthly payment associated with a shorter loan term.
Additionally, with a 15-year mortgage, you will pay off your home faster and save thousands of dollars in interest over the life of the loan.
Is refinancing into a loan with a shorter term your best option? Learn more here.
Comparing 15- And 30-Year Mortgage Terms
The 30-year mortgage is the most prevalent mortgage scheme in the United States. In reality, 85 percent of homebuyers choose 30-year fixed-rate mortgages.
Most homeowners choose a 30-year mortgage over a 15-year mortgage because it offers the lowest monthly payment. However, there are advantages and disadvantages to both sorts.
Most people believe that because a 30-year mortgage is paid twice as long as a 15-year mortgage, the total interest paid will also double.
However, more interest paid over a longer period accumulates more quickly.
In the scenario above, a 30-year loan would incur approximately $92,000 more in interest than a 15-year loan. That’s over 150 percent greater interest overall.
Remember that these figures are for a $200,000 loan, which means that the additional interest you pay for a 30-year mortgage vs. a 15-year mortgage is over half of the total loan amount.
How much more interest may you save via refinancing?
A 15-Year Refinancing Can Provide Substantial Savings
Refinancing into a 15-year mortgage can significantly reduce your loan term and total cost.
Suppose you purchased a home with a 30-year mortgage. After three years, a 15-year loan is refinanced. In the end, you will pay off the mortgage in 18 years (assuming you do not refinance again).
Although your monthly payment may be larger, you will save a significant amount on interest.
There are additional advantages to a 15-year refinancing.
You may create equity and become debt-free far sooner than you would otherwise.
However, it is vital to understand that your monthly payment would be significantly higher after a 15-year refinancing.
If your income has increased since you took out the loan, or if you have fewer debts, a larger mortgage payment may be acceptable.
But for some, spending a larger portion of their monthly salary on housing makes little financial sense.
However, you also have additional choices for paying off your mortgage early.
You Have Two Choices: Pay Off Your Mortgage Early or Refinance to a 15-Year Term
When contemplating a 15-year refinancing, homeowners should carefully examine the financial implications of a larger monthly payment.
Evaluate your budget and the impact of the increased payment on your ability to pay other monthly bills and invest.
Remember that it is a late payment if you pay less than the total amount owed. This could ruin your credit and put your property at risk. Your risk is significantly reduced with a 30-year loan.
And remember, refinancing incurs closing expenses, just like your initial mortgage. You must ensure that the long-term benefits of refinancing surpass the initial expenses.
Paying off a 30-Year Mortgage
As the monthly payment for a 30-year mortgage is less than that of a 15-year mortgage, you have more budgetary freedom.
This might be useful if your income fluctuates, you lose work, or you have financial emergencies.
You also have the option to repay your debt faster.
If you want debt-free but cannot commit to a 15-year refinancing, consider making extra payments on your 30-year loan.
By making additional monthly payments of $100, you may reduce your 30-year mortgage term by five years.
Or, if you have a substantial amount of spare income, you may pay an extra $500 per month to reduce your loan term to 15 years and save $82,200 in interest. Here is what you would pay for a new $200,000 loan.
With this technique, you will continue to pay more than if you refinanced to a 15-year loan. This is because the 30-year mortgage has a higher interest rate than the 15-year mortgage.
But, for some, the additional monthly payment flexibility is vital.
You can always elect to keep the additional $500 payment. This might be significant if you have a future loss of income or an increase in costs.
What Are the Mortgage Rates Today?
The thirteen-week low for mortgage rates as reported by Freddie Mac.
No matter the loan length, the interest rates are modest. Refinancing could result in substantial savings.
Compare interest rates and loan terms from a number of lenders by requesting bids. Determine which choice is optimal for you.
