The 15-Year Fixed-Rate Refinance

According to the smart folks at the Harvard University Joint Center for Housing Studies, the less wealthy you are, the more you rely on your home as an investment. In the wake of the housing bust, the researchers re-assessed their study to see if this was still the case. And they said,

"We conclude that homeownership continues to represent an important opportunity for individuals and families of limited means to accumulate wealth."

One of the best ways to accumulate this wealth is with a 15-year fixed-rate refinance. You amass home equity twice as quickly, pay less interest and hopefully get rid of your mortgage before you retire. The 15 year refinance is a kind of “forced savings” plan that can’t be easily tapped any time you want a vacation or a new toy. Your mortgage is a safer place to invest your money — it won’t be subject to the ups and downs of equities or bonds.

What Is It?

The 15-year fixed rate refinance is amortized (repaid -- amortize literally means "kill off") over a 15-year term. Part of your monthly remittance covers the interest for the previous month, and the rest reduces your balance. As the loan is repaid, there is less interest due each month and more of your payment goes toward reducing the principal – until it equals zero.

“Fixed rate” means that once you close on your refinance, your interest rate (and your required principal and interest payment) do not change.

What's Great About It?

The 15 year refinance mortgage is a favorite for several reasons.

  • Refinance rates are lower. You might not be able to reduce your rate much by refinancing from one 30-year fixed mortgage to another one. But interest rates on 15 year refinances are almost a full percent lower than 30 year rates!
  • You pay less interest over the life of the loan. A $300,000 refinance at 4.5 percent over 30 years costs $247,220 in interest, while the 15-year refi at 3.625 percent costs just $89,360.
  • You pay off your mortgage in half the time, but your payment is not twice as much. Consider the example above — the payment on the 30 year refinance (principal and interest) is $1,520, while the 15 year payment is $2,163 — just $643 more.
  • Mortgage insurance costs less. Because 15 year refinances are considered less risky by mortgage lenders and insurers, the MI premiums are lower. For example, Genworth charges borrowers with 700 FICO scores .62 percent per year for 30 year loans, but just .54 percent per year for 15 year mortgages.

What’s Not Great About It?

This loan isn’t right for everyone. The main disadvantage of paying down your mortgage faster is that it’s difficult to get your money out if you need it.

Before you refinance with a 15 year mortgage, make sure that you’ve taken care of these items:

  • Take advantage of any matching contributions your company makes to your retirement.
  • Pay off high interest debt. Don’t pay down a 3.5 percent mortgage while ignoring an 18 percent credit card balance.
  • Create an emergency fund. At least two months of expenses if you job is safe and six months or more if you’re self employed, on commission or in a weak job market.

Who Is it For?

The 15-year fixed rate refinance is right for many homeowners. If you can afford the higher payments and want to speed up the accumulation of home equity, it’s a good loan. Others who can benefit from a 15-year fixed rate refinance include:

  • Investors (as rents increase over time, the mortgage payment will not)
  • People who plan to sell (government refinances are assumable, which can help homeowners sell the property later)
  • People with fixed incomes
  • Homeowners who need help with budgeting
  • Those who wish to stabilize their payments by refinancing out of adjustable mortgages

How Do You Get One?

The 15-year refinance is widely available. These mortgages are sold and backed by a huge variety of providers and qualifying varies between programs. The largest challenge for many is that 15-year refinances come with higher payments and so applicants must have higher incomes to qualify. The chart below shows a range of requirements for 15-year refinances – conventional, community and government products.

Equity Needed Debt-to-income Ratio Minimum FICO Loan Category
5-20% 36% 620-700 Conventional Loans
3% 41% 600-660 Community Loans
0-10% 45% 500-580 Government Loans
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