Many homeowners face a financial decision whether to refinance their 30-year fixed loan into a 15-year term. There are many advantages and a few disadvantages of doing this. Read on to see what they are.
When should you think about a 15-year refinance?
If you've been paying on your mortgage for several years, consider switching to a 15-year home loan to save on interest and build equity faster. And, if you've been paying extra each month to pay down your principal, it could be a wise move. Just like with any mortgage, you have to look at the numbers. Ask yourself:
- What is my current interest?
- What are today's 15-year interest rates?
- What's my current payment?
- What would my new payment be?
- Would I be able to afford the new payment?
- How much will it cost to refinance?
If your family income has increased and a higher payment isn't an issue, shortening the term saves you substantial interest over the life of the loan. So rather than spending your higher income, you're investing it in your home. Paying down your equity is always a smart move.
However, if your budget is already tight and refinancing to a 15-year makes it tighter, that wouldn't be the best move. In that case, if your current rate is high, look into a 30-year fixed to see if it will give you more room in your budget.
15-Year Conventional vs. VA
If you currently have a conventional 30-year fixed loan, compare your rate with a 15-year. Unless your current interest is high, your new 15-year payment will most likely be more because you're putting additional money towards principle. But, keep in mind, you'll also be building equity faster. Many homeowners decide to take on the higher payment because they know they'll be saving money in the long run.
Are you a veteran or service member with a VA loan? The VA IRRRL is an excellent option. It's a streamlined refinance that lets you change your rate and term. Going from a 30-year to 15-year fixed could be a way to retire without a mortgage payment.
Check the 15-Year Refinance Rates
Surprisingly enough, 15-year and 30-year rates can be very close — it just depends on the market. Sometimes they are the same, and other times they're not. Plus, it depends on if you're getting a conventional or VA. Rates for VA loans are almost always lower compared to conventional rates.
Take a look at your options and see what works best for you. With rates being so low, now could be the best time to get a refinance.
Saving on interest over the mortgage term is the most significant advantage no matter what stage of life you're in. If a 15-year doesn't fit easily into your monthly budget — take a look at the 20-year term.
Increase Equity Faster
With a 15-year term, you will build equity faster. But, on the flip side — you have to make sure you feel comfortable with the new payment. It's a good idea to review your budget with your higher payment to see if it works for you.
If your current mortgage has private mortgage insurance (PMI), you could refinance into a 15-year and remove the PMI as long as you have enough equity. Getting rid of the PMI will lower your payment, and a 15-year payment may not be that much different because you won't be paying mortgage insurance.
Of course, you always have the option not to refinance and just pay extra on your mortgage each month. As long as you can be disciplined and you have an excellent low-interest rate, that can work too. You'll be paying down the principal faster without the cost of a refinance.
Who should consider refinancing into a 15-year mortgage?
If you're planning on retiring within the next 15-years, this shorter-term mortgage can make your retirement years much easier. Having a more carefree retirement is a goal of many homeowners. And when you don't have a mortgage, living on a limited income becomes much more comfortable.
Consolidating debt could be another reason to get a 15-year mortgage. If you're paying high interest on credit cards and loans, doing a cash-out refinance to pay off debt can lower your overall budget even though your mortgage payment is higher.
Some homeowners that want more structure and discipline in their budget opt for a shorter term. They consider this forced savings. And once they get used to the higher payment, they're glad they chose a shorter term.
What about a 15-year for investment property or second home? You can have the same advantages of refinancing your primary residence and then some. For example, paying off an investment property early can mean better cash flow which is always good for landlords.
It's always a smart idea to check out all of your refinancing options. And looking into a 15-year mortgage is an excellent start.