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15-Year Refinance Rates: Should You Refinance in 2019?

15 year refinance

When you borrow a 30-year mortgage to buy a home, it can feel like an impossible task to pay off your loan balance. There are ways to relieve some of that burden though, and one route to consider is refinancing your mortgage into a shorter loan term. If you’ve looked at 15-year refinance rates recently, perhaps this particular loan term has piqued your interest.

Refinancing into a 15-year mortgage can save you thousands of dollars and allow you to pay off your biggest debt much sooner. But there is a lot to consider before jumping into a 15-year refinance. Below, we’ll help you navigate what to consider before beginning the refinancing process.

This guide will cover:

Today’s refinance rates on 15-year fixed-rate mortgages

How do 15 year refinance rates stack up against 30-year fixed-rates? Generally speaking, rates on 15-year mortgages are often lower and have likely fallen since most current homeowners brought their homes.

As of early October 2019, the average interest rate on 15-year fixed-rate mortgages was 3.05%, while the average interest rate on 30-year fixed-rate mortgages was 3.57%, according to Freddie Mac’s Primary Mortgage Market Survey.

Although interest rates on 15-year mortgages are usually lower than 30-year loans, you can expect the monthly mortgage payments to be higher, since there’s a shorter amortization period to pay off the loan. Let’s look at an example, comparing a 30-year mortgage to 15-year refinance rates using LendingTree’s mortgage payment calculator:

15-year mortgage  30-year mortgage 
Loan amount  $200,000 $200,000
Interest rate  3.05% 3.57%
Monthly payment 

(Principal and interest)

$1,385.98 $905.92
Total interest paid  $49,476.01 $126,132.11

The table above shows that although the monthly payment on the 15-year mortgage is about $480 more than the 30-year mortgage payment, you’d not only pay the loan off in half the time, but save nearly $77,000 in interest over the life of the loan.

When to consider refinancing into a 15-year mortgage

One of the main reasons to consider a 15-year mortgage refinance is if you’re looking to speed up the timeline to pay off your mortgage, said Michael Becker, a branch manager with Sierra Pacific Mortgage in Lutherville, Md.

Additionally, as we illustrated above, it could make sense to refinance into a 15-year mortgage if you can secure a significantly lower interest rate, which could lead to hefty interest savings.  Becker said he’s seen some instances in which refinance rates on 15-year fixed-rate mortgages are nearly a full percentage point lower than 30-year loans.

Even with these benefits, the trade-off you need to consider is a higher monthly payment. Exactly how much your payments increase depends on how long you’ve had your existing mortgage, Becker said.

“For example, if you’re in a 30-year mortgage and you’ve been in it for 10 years and you have a high rate, let’s say 5% […] and you’re dropping to 3% (or) 3.25%, you might not see an increase in your monthly payment,” he said. “It’s all about interest savings and getting your house paid off.”

Let’s look at an example of a borrower who’s considering a 15-year refinance. They first borrowed a $200,000 mortgage 10 years ago with a 30-year term and a 5% interest rate. We’ll use LendingTree’s mortgage refinance calculator to break down the numbers:

Existing mortgage  Refinanced mortgage 
Years until payoff  20 15
Interest rate  5% 3%
Monthly payment  $1,074 $1,121
Total loan cost $256,601 $204,978

Although the homeowner’s monthly payment increases, it is only by $47 each month, which is likely attributed to the fact that her estimated interest rate is dropping by two percentage points. She’s also shortening her term by five years and saving more than $51,000 in costs over the life of the loan.

Refinancing your mortgage vs. making extra payments

If your goal is to get rid of your mortgage sooner, there’s more than one way to do so. Aside from refinancing into a 15-year mortgage, you could also commit to making extra payments toward your mortgage principal.

Say you have a 30-year fixed-rate mortgage with a $200,000 loan amount and a 3.57% interest rate. If you make extra payments of $500 each month, you could cut your loan term by about 14.5 years, bringing you closer to a 15-year payoff.

The big downside to making extra payments on a longer-term loan is the chance that you might not consistently make those extra payments, since you’re not obligated to make them. If you are only making extra payments here and there, you won’t save as much money over the long term as you would with a 15-year refinance.

You also won’t get the benefit of a lower interest rate, which means that your total interest cost may end up being higher.

Pros and cons of 15-year refinance

If 15-year refinance rates are attractive enough for you right now, consider the major pros and cons before you make a move:

Pros  Cons 
  Build equity faster   Higher monthly payment
  Pay off your mortgage sooner   Less room for other financial goals
  Receive long-term cost savings   Possibly harder to make extra payments toward loan principal
  Secure a lower interest rate   Upfront closing costs

How to refinance into a 15-year mortgage from a 30-year mortgage

If you do decide that 15-year refinance rates are attractive enough to warrant a refinance, you’ll have a number of steps to follow in order to make it happen. Below is a list of steps you should take:

Determine your estimated home equity

Many lenders require you to have a certain amount of equity in your home in order to qualify for a refinance.

The amount of equity required varies based on the mortgage program you’re applying for, but conventional loans typically require at least 3% equity, while government-backed loans might allow you to refinance with 2.25% equity or less. These requirements apply to rate-and-term refinances. If you’re planning to apply for a cash-out refinance, you’ll need at least 20% equity for conventional or FHA loans and 10% equity for VA loans.

In general, more equity will lead to more favorable mortgage terms. If you don’t currently have enough equity in your home, you may need to pay down your mortgage principal before refinancing becomes a viable option.

Evaluate your credit score

Your credit score is an important factor in determining your eligibility for refinancing, as well as determining the interest rate on your new loan.

You’ll need a minimum 620 credit score for a conventional refinance and a 580 for an FHA refinance. There is no credit score minimum for VA refinances.

However, to qualify for the best 15-year refinance rates, aim for a 740 credit score or higher.

Use LendingTree’s credit score tool to estimate your credit score, though it’s worth noting that every lender may evaluate your score a little differently. You can also pull your credit report from each of the three major credit bureaus once a year for free at AnnualCreditReport.com.

If your credit score isn’t where you’d like it to be, or if you’re a few points away from getting a better refinance rate, it could be worthwhile to work on improving your credit score before you apply.

Calculate your debt-to-income ratio

Your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income used to make your monthly debt payments, is a key indicator lenders use to evaluate your financial health.

A lower debt-to-income ratio tells the lender you have a lower risk of defaulting on your mortgage, since less of your income is dedicated to debt payments. You’ll need a DTI ratio of 43% or less to qualify for a refinance, though your lender may allow as high as 50% under certain circumstances.

A 15-year mortgage would likely increase your DTI ratio since you’ll be taking on higher monthly payments. So if your ratio is already on the higher end, you might need to take steps to reduce it — whether that’s increasing your income or paying off your other debt — before considering a refinance.

Gather the right documentation

Lenders will require certain documentation before making a refinance offer, and it helps to have those documents prepared ahead of time. You’ll likely be expected to provide the following:

  • Paycheck stubs from the past month
  • Proof of additional income, if applicable
  • Tax returns from the past 2 years
  • W-2 from the past 2 years
  • Profit and loss statement for the past year, if self-employed
  • Checking and savings account statements
  • Investment account statements
  • Statements for other debts, such as student loans, auto loans and credit cards
  • Driver’s license or other government-issued photo ID

Your lender might request additional documentation, so be prepared to gather more if necessary. The more organized you are when getting started, the easier the process will be.

You’ll also need to budget for closing costs, which can range from 2% to 6% of your loan amount, depending on the size of your loan. Read our guide on refinance closing costs for a thorough understanding of the expenses you’ll be expected to cover.

How to refinance out of a 15-year mortgage

A 15-year mortgage doesn’t fit into every borrower’s financial picture. What if you’re currently in a 15-year loan and want to refinance out of it?

The same eligibility requirements needed to refinance into a 15-year loan would apply when refinancing into a longer-term loan — there will be credit and income verification, plenty of paperwork and closing costs. One thing that can work in your favor is that a smaller monthly mortgage payment likely means a lower DTI ratio.

Borrowers who want to extend their loan term are usually looking to free up some income, Becker said. Perhaps their financial circumstances have changed and the larger monthly payment doesn’t work for them anymore.

It’s important to note that there’s a chance that your interest rate will be higher if you refinance into a 30-year mortgage, unless you originally borrowed your 15-year loan in a higher-rate environment, such as last fall. In October 2018, interest rates on 15-year mortgages hovered around 4.3%, and for the better part of 2019, rates on 30-year mortgages have averaged 4% or lower.

But because you’re stretching out the timeline to pay off your mortgage, you’ll pay more in interest. This may not be a deal breaker for some borrowers, though, Becker said.

“Everybody wants to limit how much interest they pay, but there’s something to be said about cash flow,” he said.

The bottom line

If your other financial priorities are already on track — including boosting your retirement savings and emergency fund — and you’re confident you can handle the increased monthly payment for the foreseeable future, then a 15-year refinance could make a lot of sense.

But refinancing also comes with upfront costs and a loss of flexibility. You’ll also need to be sure you plan on staying in your home for at least the next few years to recoup the costs of refinancing. Even if 15-year refinance rates are attractive enough to justify refinancing, it may not be worth it if you’re unable to recoup the added closing costs to completing the transaction.

Securing a lower interest rate and shortening your repayment period could save you a lot of money over the long term, but if it would hinder you from making progress toward your other financial goals, the long-term savings may not be worth it.

In the end, it’s a decision that should be made within the context of your entire financial situation.

 

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