Fixed mortgages with shorter terms have lower rates -- compelling more homeowners to refinance their mortgage from 30 year mortgages to 15 year home loans. Paying less interest over the life of the loan is an attractive idea, but determining whether or not a 15-year home loan is appropriate is essential before refinancing.
Refinance to a 15 Year Mortgage: A Good Solution?
MSN Money recommends meeting all of these conditions before refinancing to a shorter-term:
- Save a minimum of three-to-six months for emergencies.
- Be sure higher mortgage payments won’t cause a shortfall in the monthly budget.
- Fund retirement accounts fully before taking on higher mortgage payments.
- Continue contributing to savings on a regular schedule.
For those “good to go,” a 15-mortgage is less likely to cause financial stress, but thinking ahead to the “what ifs” is also a good plan. Consider worst-case scenarios such as job loss or other hardships; the additional weight of a higher mortgage payment could make the difference between keeping the mortgage in good standing or struggling to make payments.
Homeowners who have paid more than half of their current mortgage balance or who are planning to move in a few years may not realize sufficient savings as the costs of refinancing offset estimated savings. Double check this with a refinance breakeven calculator.
Now that the road ahead is free of obstacles, here are the benefits of a 15-year home loan.
15 Year Refinance Rates Lower than 30 Year Fixed Rates
Recently the spread between 15 and 30 year refinance rates has been close to one percentage point. 15 year rates typically run lower than 30 year rates, but be aware that both the spread and actual refinance rates can change quickly.
Refinance to a 15 Year Mortgage: Pay Now, Play Later and Save Big!
Prior to the recession, homeowners were confident about borrowing against their home equity; this easy source of cash funded everything from remodeling to world travel. In the aftermath of the foreclosure crisis, homeowners have realized the importance of building home equity by paying off their mortgages as quickly as possible.
While a 15 year mortgage requires higher monthly payments, it can also save thousands in interest paid over the life of the home loan. Here’s a comparison:
30 Year Mortgage
Mortgage amount: $200,000
Mortgage interest rate: 4.50%
Principal and interest payment: $1,013.37
Total interest paid: $164,813.67
15 Year Mortgage
Mortgage amount: $200,000
Mortgage interest rate: 3.625%
Principal and Interest payment: $1,442.07
Total interest paid $59,573.44
Most mortgages are refinanced or otherwise retired before their full repayment term, but this example illustrates the benefit of how interest is paid down much faster on a 15 year loan.
A 15 year mortgage offers more benefits; think of the improved cash flow a mortgage-free lifestyle can provide. A 1 -year mortgage can help you meet financial and personal goals ahead of schedule.