30-year mortgages are more popular for first-time homebuyers since it’s easier to qualify for them. These mortgages have lower monthly payments, which improve your debt-to-income ratio, and those low payments also reduce the stress of making payments. However, some people strengthen their financial situation and become confident about their ability to make payments on a 15-year mortgage. This guide will explore the pros and cons of refinancing a 15-year mortgage.
What is a 15-Year Mortgage?
A 15-year mortgage is a shorter version of the 30-year mortgage. The concepts are the same. You have to make monthly payments and have an interest rate that dictates your total expenses.
How Does a 15-Year Mortgage Compare?
15-year mortgages have higher monthly payments than 30-year mortgages but let you get out of debt sooner. They are optimal for people who are earning higher incomes and can keep up with other living expenses while paying an elevated mortgage.
Should You Refinance to a 15-Year Mortgage?
A 15-year mortgage makes the most sense for a primary residence if you can afford the monthly payments. Real estate investors usually avoid these loans because they reduce monthly cash flow. Real estate investors care more about current cash flow than long-term interest savings from a 15-year mortgage. However, a primary homeowner may care more about getting rid of the mortgage once and for all. A 15-year mortgage accelerates the path to a debt-free property.
Pros of Refinancing to a 15-year Mortgage
These are some of the advantages of switching to a 15-year mortgage.
Paying Off the Loan Faster
You will pay off a 15-year loan twice as fast as a 30-year loan. A mortgage is the highest monthly expense for most people. Knocking this expense out early can help you save more money leading up to retirement.
Saving Money on Interest
Homeowners with 30-year mortgages end up paying a lot more in interest, even if you adjust interest payments for inflation. Paying off your mortgage in 15 years instead of 30 years gives the interest less time to compound.
Getting a Lower Interest Rate
15-year mortgages typically have lower interest rates than 30-year mortgages. Your monthly payment will be higher, but a higher percentage of each payment will go toward the principal instead of interest.
Taking Advantage of Equity Benefits
Accelerating your mortgage payments will help you build equity in your home. You can tap into that equity through a home equity loan or a home equity line of credit. You can even qualify for a reverse mortgage when you reach retirement age.
Removing PMI
You can remove private mortgage insurance from your loan as soon as you have 20% equity. A 15-year mortgage will help you reach that milestone sooner. You also don’t have to worry about private mortgage insurance once your mortgage reaches its midpoint. A 30-year mortgage has a 15-year midpoint, while a 15-year mortgage has a more convenient 7.5-year midpoint. You may encounter this rule if you have an interest-only mortgage or a balloon payment.
Potential Cons of Refinancing to a 15-Year Mortgage
A 15-year mortgage can get you out of debt sooner. That’s an enticing perk, but ignoring these significant disadvantages can result in a bad decision. It’s important to assess the pros and cons of any financial product before using it.
Higher Monthly Payments
You will have to pay a few extra hundred dollars per month toward your mortgage. Some people can keep up with these elevated payments. However, you should carefully review your budget before committing to a shorter mortgage term.
Mortgage Refinancing Costs
Mortgage refinancing costs are equal to a percentage of the mortgage’s total balance. This percentage typically falls between 2% to 6%. If you are refinancing a $500,000 mortgage to a 15-year loan, you can expect mortgage refinancing costs to range from $10,000 to $30,000. You can add those costs to the backend of your loan, but it will extend your mortgage’s duration or further increase your monthly payments.
Opportunity Cost of Investing
You will save money on interest but also miss out on the chance of earning higher returns through investments. Some people take the money they save from a 30-year mortgage and put it into an index fund. Many real estate investors will opt for 30-year mortgages just to keep their cash flow higher.
Temporarily Lowers Your Credit
Refinancing to a 15-year mortgage will trigger a hard credit check. This hard credit inquiry occurs when a lender assesses your financial profile to determine if you can make the monthly payments. You will lose a few points during this process. It’s easy to recover, but you shouldn’t get a hard credit check before applying for a substantial loan.
How to Refinance to a 15-Year Mortgage
Are you eager to get a 15-year mortgage? These are the steps you can take.
Preparing for the Refinance
Determine the monthly payment you can afford and gather the necessary documents for your refinance. Lenders will request your ID, proof of address, proof of income, Social Security number, tax returns, and other resources.
Comparing Rates and Choosing the Right Lender
It’s a good idea to apply for multiple loans instead of committing to the first offer you find. Comparing rates and terms can help you decide on the best deal for you. While interest rates are the driving force for comparisons, any extra features or perks a lender provides can become important if rates are similar.
Navigating the Refinance Process
You will have to get an appraisal for your property and negotiate closing costs for your loan. Your lender will guide you through the refinance process and let you know what to do next leading up to your closing.
Closing on the Loan
You and the lender will sign legal documents confirming the refinance. You must wait three business days after closing for the changes to go through. This 3-day window gives you enough time to change your mind or adjust the loan if there are any discrepancies in important details like the APR.
When Refinancing to a 15-Year Mortgage Makes Sense
Refinancing to a 15-year mortgage can make sense under the following scenarios.
When Interest Rates are Low
Refinancing your mortgage lets you capitalize on lower interest rates and reduce your monthly payments. Locking in a fixed rate will result in stable monthly payments that will not increase if the Fed decides to raise rates.
When You Have Secure, Long-Term Income
A high long-term income makes it easier to cover the highest costs of a 15-year mortgage. You will then have more flexibility after the 15-year mortgage is paid off. You get to cross the finish line after 15 years instead of being at the halfway point of a 30-year mortgage. If your income decreases after you have paid off your mortgage, it isn’t as stressful.
When You’re Planning for Retirement
A 15-year mortgage makes it easier to pay off your property before you retire. Eliminating the monthly mortgage payments can make retirement more seamless.
Tips on How to Get the Best Rates for a 15-Year Mortgage
These are some of the strategies you can use to secure a better rate for your 15-year mortgage:
- Improve your credit score leading up to the application.
- Increase your income so you end up with a lower debt-to-income ratio. An extra side hustle, negotiating a raise, or job hopping can elevate your earnings.
- Compare offers from multiple lenders instead of committing to the first offer you find.
- Make a higher down payment if you have the extra funds.
- Get a co-signer who has a higher credit score and better DTI ratio than you.
Conclusion: Is a 15-Year Refinanced Mortgage Right for You?
A 15-year refinanced mortgage can be a great choice for people who can afford the monthly payments and want to get out of debt sooner. It’s important to consider if you can afford the higher payments and what you would do with the extra money if you stuck with your 30-year mortgage. Some people want the peace of mind of having zero debt, while others prefer to hold onto debt so they can allocate their funds toward profitable investment opportunities.
