When interest rates are rising, the conventional wisdom says that refinancing your mortgage is less appealing. But for some homeowners, a 15-year refinance mortgage could be a smart financial move.
Shorter mortgage terms help you increase your home equity faster. They also come with lower interest rates, and you’ll pay a lot less interest over the life of the loan.
Refinancing into a 15-year loan makes particular sense for homeowners who have been paying their mortgage for several years. It’s also a good option for those who have been paying extra to reduce their principal balance.
In addition, homeowners who have reaped the benefit of rising home values are more likely to qualify for a 15-year loan, because they will have a lower loan-to-value ratio.
A 15-year loan typically carries a lower interest rate than a 30-year loan. For example, one lender might be quoting a 30-year fixed-rate loan at 4.375 percent and a 15-year fixed rate at 3.625.
That’s a difference, or “spread,” of .75 percent — a pretty substantial difference.
Factor in the lower rate and the shorter loan term, and you would save around $150,000 in interest on a $300,000 loan.
Homeowners who have held their current mortgage for several years needn’t “start over” with a new 30-year fixed-rate loan. A 15-year refinance can help you reach your financial goals:
While 15-year home loans clear your mortgage debt in half the time, you won’t be doubling your payment to achieve this.
The scenario below shows how a five-year-old loan might look if you refinance at today’s 15-year rates.
Depending on your individual circumstances, refinancing into a 15-year mortgage could result in the same or even lower principal and interest payments. Your lower balance and better interest rate could offset the reduced loan term.
In many cases, though, the shorter loan term means your payments will be higher. Even so, a 15-year refinance could make sense financially.
If a 15-year refinance doesn’t fit your budget, you can always consider refinancing into a 20 or 30-year loan and making higher payments to eliminate your mortgage faster and reduce the amount of interest you pay. This method provides flexibility that may be a better financial option for some homeowners.
Today’s 15-year and 30-year mortgage rates have dropped for three straight weeks, according to Freddie Mac. The spread between 30 and 15-year loans is always a consideration when you choose a refinance loan.