Should I Refinance to a 15-Year Mortgage?

If you want to refinance to a 15-year mortgage, you’re probably hoping to save money on interest charges and build home equity faster. These are some of the best perks of refinancing, but you’ll have to pay upfront fees to unlock them and, in many cases, commit to a higher monthly payment. Those costs can eat up your savings and leave your monthly budget stretched thin.

We’ll review the pros and cons of refinancing into a 15-year mortgage and how to decide if a 15-year refinance is right for you.

Should you refinance to a 15-year mortgage?

Refinancing to a 15-year mortgage can save you hundreds of thousands of dollars over the life of your loan, according to LendingTree data. But before you can reap this benefit you need to ask yourself:

Can I afford higher monthly mortgage payments?On average, you’ll spend $572 more on monthly payments than you would for a 30-year fixed mortgage.

Do I have the cash to cover refinance closing costs?You can expect to pay between 2% and 6% of your loan amount in refinance closing costs. On average, this comes out to around $4,345.

Will I get a lower interest rate?If you locked in your mortgage rate before the COVID-19 pandemic, odds are you have a low rate that current mortgage rates can’t compete with. It’s not usually financially advantageous to refinance unless you can get a lower interest rate.

How long do I plan to stay in my home?A refinance can save you money, but it takes time for those savings to build. Before you make a decision, learn how to calculate and interpret the break-even point on your refinance.

Advantages of refinancing into a 15-year mortgage

  Interest savings

One of the biggest pros of refinancing to a 15-year mortgage is how much you can save on interest charges. Interest rates for 15-year mortgages are often lower than a comparable 30-year option.

With that lower interest rate, not only are you paying a smaller overall percentage to the lender, but you’ll also pay less total interest over the life of your loan. You can use a mortgage refinance calculator to estimate how much you can save by choosing a 15-year mortgage.

Example: How much interest do you save by financing your home with a 15-year mortgage instead of a 30-year loan?

Switching from a 30- to a 15-year mortgage on a $350,000 loan would save you around $276,480 in interest costs by choosing a 15-year mortgage, and your monthly payments would be about $700 higher. See our calculations in the comparison table below:

  Insurance savings

Private mortgage insurance (PMI) is typically required on conventional mortgages if you make less than a 20% down payment. You can get rid of PMI payments when your principal balance reaches 80% of your home’s appraised value at the time you took out the mortgage. You can refinance whether you’re still making PMI payments.

→ If you don’t yet have 20% equity in your house, a 15-year loan term will help you reach that point more quickly and allow you to remove that extra cost sooner.

→ If your home’s value has appreciated since you took out your mortgage, that appreciation can count as equity when you refinance.

For example: If you made a 10% down payment on a $200,000 home that you’ve had for five years, and your house appreciated 8%, you should have more than 20% equity in your house now. If you refinance your house and don’t take cash out, it’s likely you won’t be required to pay for PMI.

  Equity gains

Home equity is the difference between what you owe on your mortgage and what your home is worth. The more equity you have the better, since a large amount of equity in your house means:

• You’ll own your house outright sooner. A 15-year mortgage means you’ll be debt-free in half the time of a 30-year mortgage.
• You’ll have a more secure investment. Even if the market dips, you’ll likely never owe more on your home than it’s worth.
• You’ll have access to cash at competitive interest rates. The rates offered by second mortgage loans are typically much lower than personal loans, credit cards or other similar options. These loans convert a portion of your home equity to cash:
  • Home equity loan
  • Home equity line of credit (HELOC)
  • Cash-out refinance

 Learn more about how to choose between a 15-year mortgage versus a 30-year loan.

Disadvantages of refinancing into a 15-year mortgage

  Higher monthly payments

Condensing your 30-year mortgage into a loan term that’s half the length typically means that your monthly payment will increase. This may not be a problem if you’re spending less and earning more — maybe you paid off a big loan, like auto or student loans. But if your financial situation hasn’t changed much, committing a higher percentage of your income to a set payment each month means you’ll have less financial flexibility.

 Use a refinance calculator to estimate what your new monthly payment could be.

15-year mortgage payments aren’t always larger

Depending on the interest rate you qualify for, the equity you’ve built in your house and other factors, you may not have a bigger payment on a 15-year mortgage refinance. It’s more common, however, for your payments to go up than it is for them to drop.

  Refinance closing costs

National average closing costs for a refinance were $2,375 excluding taxes and recording fees, according to data from ClosingCorp, a real estate data and technology firm. You can see a breakdown of mortgage refinance closing costs here.

That can be a lot to pay out of pocket, though some lenders give the option to roll some or all of these closing costs into your new mortgage. The biggest drawback to doing this is that you’ll pay interest on the amount you financed. However, financing your closing costs can allow you to avoid draining your cash accounts or, even worse, raiding your retirement savings.

  Opportunity costs

“Opportunity costs” are the potential advantages you’ve missed out on by choosing a specific path. If you choose to refinance to a 15-year loan, you’d have to commit more money toward a mortgage — either in the form of closing costs, higher monthly payments or both. That means missing out on other things you could’ve done with that cash, for example:

• Investments with a higher return than homeownership, like stocks or peer-to-peer loans.
• Tax-advantaged investments, like a 401(k), individual retirement account (IRA), health savings account (HSA) or 529 college plan.
• Paying down debt that has a higher interest rate than your mortgage.
• Enhancing your quality of life with fun activities like vacations, dining out or upgrading your car.

Before you make a big move toward paying off your mortgage — like refinancing into a 15-year loan — make sure that it’s the smartest use of your money. If putting more funds toward your mortgage is going to lead to increased credit card or personal loan debt, reconsider refinancing.

When is a 15-year mortgage refinance a good idea?

A 15-year mortgage refinance may be right for you if:

• The new, higher payment isn’t going to strain your budget
• You’ll keep the house long enough to break even on the refinance
• The new interest rate is at least 0.5 percentage points lower

Alternative to mortgage refinancing: Making extra payments

If your goal is to save on interest, there’s more than one way to do it. Aside from a 15-year refinance, you could regularly make extra payments toward your principal balance. The advantage of doing this is that you retain a low minimum monthly payment — so you have some flexibility in your budget if needed — and you still pay off your loan more quickly.

Example: Making extra mortgage payments

Let’s say you’ve been making payments on your 30-year fixed-rate, $315,000 mortgage for five years at a 4% interest rate. Your current loan balance is around $288,000. If you pay an extra $1,400 each month, you could cut your total interest paid by about half and effectively have a 15-year loan payoff.