Refinancing to a 15-Year Mortgage: The Pros and a few Cons
10 minute read
Refinancing to a 15-Year Mortgage: The Pros and Cons
Refinancing is an amazing and efficient way to improve the characteristics of your home loan. For one, you may choose to refinance in order to lower your interest rate and subsequently decrease your monthly payments. Or, you might choose to refinance out of an adjustable-rate mortgage and into a fixed-rate mortgage.
However, you can also refinance in order to decrease the length of your loan. Many mortgage loans are for a 30 year repayment period, but you can refinance to a shorter one in order to get out of debt more quickly.
Here’s everything you need to know about refinancing into a 15-year mortgage so you can decide whether or not this is something that sounds like a smart decision for you.
Understanding Loan Terms
A 30-year loan term is pretty standard for most home mortgages, and as the name implies, it means it will take you 30 years to pay it off if you follow the set schedule. With a 15 year mortgage, you’re cutting the amount of time in half and paying off your loan in just 15 years.
Why would you want to do this? Each month when you make a payment toward your loan, you may make payments towards both a principal balance and interest. The principal balance is the amount of money you borrowed initially. The interest is a percentage of your remaining principal balance that gets paid to your lender as a form of profit for borrowing from them.
You will make interest payments for the entire life of your loan. So consider that you’ll make extra interest payments for a 30 year period with a 30-year mortgage, whereas you’ll only make interest payments for 15 years in a 15-year mortgage.
Real World Example
This idea can be hard to wrap your head around, so let’s try to make it easier to understand with an example. Let’s say you take out a $100,000 mortgage over a 30 year period with an interest rate of 3.5%. Each month, you’ll make a mortgage payment of $449 to cover both the cost of the interest as well as the cost of the principal. When all is said and done, you’ll have paid $61,640 in interest ($161,640 total), which is a lot more than you had originally bargained for.
However, let’s take the same $100,000 mortgage with 3.5% interest and cut the loan terms down to just 15 years. Your monthly payment will shoot up to $714.88. However, the total amount that you’ll pay in interest will drop down to just $28,678 ($128,678 total), which is far lower than what you’d pay with a 30-year mortgage.
So as you can see, the immense possible savings in the long-term are a major reason why so many people decide to go with a 15-year mortgage instead of a 30 year or decide to refinance into a 15 year later on. However, there are still some downsides to consider.
Advantages of Refinancing to a 15-Year Mortgage
There are plenty of solid reasons to refinance into a 15 year mortgage, and that’s why so many people decide to do it. Here are some of the more attractive benefits.
Less Interest Total
As you saw in the example above, one of the best reasons to move to a 15-year mortgage is to enjoy paying less interest total throughout the life of the loan. Since you’ll only be paying off your mortgage for half as long as a 30-year, you’ll save money by not having to pay interest on the additional years that would have otherwise been required.
Access to Equity
Equity is the amount of money you own in your home. In other words, if you’ve paid off $20,000 worth of your $100,000 mortgage, you’d have 20% equity in your home. Accessing equity can only be done in a few different ways, and having so much money wrapped up in your mortgage can prevent those funds from being used elsewhere.
However, you’ll build up equity in your home much sooner with a 15-year mortgage, as you’ll essentially be owning your home at two times the initial rate.
Become Debt Free Sooner
One of the more obvious and attractive reasons to switch to a 15-year mortgage is to get out of debt sooner. Having no debt can help to increase your savings and give you more financial freedom. You might be able to take that vacation you’ve wanted to take, or you can finally put some excess funds into home improvements.
On top of that, it can help reduce some anxiety and stress, as you’ll no longer need to worry about forking over hundreds of dollars a month towards your mortgage. And all in all, it’s just a really comfortable feeling to be completely debt-free.
Lower Interest Rate
Depending on your lender, 15-year mortgages tend to have lower interest rates overall compared to 30-year mortgages. This is because there’s usually a little less of a risk on the lender’s end, as the repayment period is shorter and gives you a smaller window to be late on your payments.
So not only will you pay less interest simply because the loan’s terms end sooner, but you’ll also owe less because interest rates overall will likely be lower compared to 30-year rates.
Downsides of Refinancing to a 15 Year Mortgage
While there are plenty of benefits to refinancing a 15- year mortgage from a 30-year mortgage, there are also some downsides to consider.
Higher Monthly Payments
Perhaps the most prominent disadvantage of refinancing to a 15 year mortgage is that your monthly payments will increase pretty dramatically in order to compensate for cutting the length in half. While it won’t necessarily double your monthly payments, it will still probably force you to owe a few hundred more per month.
But keep your eyes on the prize, because that extra money will pay off in the long term.
You also can shop around to lenders that offer reductions in closing costs, like our $0 lender fee programs at Network Capital. We do everything in-house, from intent to proceed to closing, so we can save you money and time where it matters most.
When Should You Refinance to a 15 Year Mortgage?
Refinancing can essentially be done at any time, and you may even decide to go through with this if you’re just looking to save a little bit of extra money. However, there are certain times when it might be especially wise to give it a go.
Some signs that it might be a good idea to refinance into a shorter loan term include:
- Your credit score has increased since you got your initial loan.
- Interest rates are at a lower point now than they were with your initial mortgage.
- You’ve had an increase in income since your initial loan approval.
- You’re able to afford higher monthly payments.
- You have more than 15 years left to go on your initial mortgage.
What are the Requirements for Refinancing?
While every lender differs on the requirements necessary to obtain a 15-year mortgage refinance, you have the freedom to shop around and try to find a lender that matches what you can give.
At Network Capital, you can obtain conventional refinancing if you have a credit score of at least 620. Those with a score of 740 and above may enjoy lower down payments and more attractive interest rates. Additionally, it’s good to have a debt to income ratio (DTI) of 36% or below. But don’t worry – we can work with you if it’s a little bit higher.
If you feel like your credit might not be in the best spot, you may still be able to qualify for other options. FHA loans are available to homeowners with a credit score of 580 or higher, and they’re one of the most accessible types of home loans on the market.
Also, generally speaking, your name must have been on the title for at least six months before you can refinance, which just means you need to have owned the home for at least half a year.
Are There Other Mortgage Term Options?
If you’re looking to refinance out of a 30-year mortgage and into one with shorter terms, a 15 year option isn’t the only one available. Most lenders let you refinance into loans of almost any length.
While 15 and 30 are most popular, you might be able to snag a 10-year mortgage or a 20-year mortgage to try to meet right in the middle.
Most mortgages start out with 30-year terms, meaning you’ll pay them off in 30 years. However, refinancing into a 15 year mortgage can cut that time in half, letting you enjoy a debt-free life while also paying lower interest overall.
The major benefit of 15-year mortgage refinancing is that you owe less interest as a whole because the repayment period is physically shorter. But additionally, lenders are usually more willing to offer low-interest programs for 15-year mortgages. Also, refinancing lets you get out of debt faster and access your equity more quickly.
On the other hand, refinancing to a 15 year mortgage will force you to pay higher monthly payments since you’re paying off your loan over a shorter period. Also, you’ll be responsible for closing costs upfront, which can amount to 2-3% of the total price of your mortgage.
Refinancing can be stressful, but don’t let it become a headache. At Network Capital, we’re proud to offer refinancing packages that are simplified and streamlined in-house. This not only lets you get to the closing table in as few as 15 business days, but it also lets you save money through our competitive rates.
Want to live better? Apply now for one of our refinance programs and start on the path towards financial freedom.