When you refinance your mortgage, remember to consider a way to save money in the long run: Refinance into a 15-year loan.
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There are at least 2 ways that refinancing into a 15-year mortgage saves money:
- Interest rates on 15-year, fixed-rate mortgages typically run about three-quarters of a percentage point lower than the interest rates on equivalent 30-year home loans.
- You pay interest for a shorter time. This seems obvious, right? But the difference between making 360 house payments (a 30-year loan) and 180 house payments (a 15-year loan) can total tens of thousands of dollars. And you're mortgage-free sooner.
A 15-year mortgage carries 2 major drawbacks:
- The monthly payments are higher than for a 30-year loan.
- It restricts your flexibility when money is tight.
Read more about the drawback of a 15-year-loan's higher monthly payments.
"From a financial standpoint, if you can afford a 15-year payment, it definitely makes sense to do that," says Ted Iturriria, vice president of loan production for AimLoan, an online lender. "The big question is, can people afford that jump in payment."
Test out loan scenarios with Bankrate's mortgage amortization calculator now.
Higher payments, less interest
Let's take the hypothetical example of Lynn, who got a 30-year mortgage for $210,000 in March 2014, with an interest rate of 4.5%. About 2 1/2 years later, Lynn refinances $200,000 for a lower interest rate. Lynn has excellent credit and can get a 30-year, fixed-rate loan at 3.625% or a 15-year loan for 2.875%.
|Current loan |
|30 years||15 years|
|Monthly principal and interest payment||$1,064||$912||$1,369|
|Total interest paid||$173,054||$128,366||$46,451|
Refinancing at the lower rate into another 30-year loan saves $152 a month and almost $45,000 in interest. Refinancing into a 15-year loan increases the monthly payment substantially ($457 more), but the lower interest rate saves Lynn a ton in interest payments (almost $82,000!) over the life of the loan.
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Not everyone can afford the higher payments of a 15-year mortgage.
"We see some going both ways," says Matt Hackett, operations manager for Equity Now, a mortgage lender based in New York City. "We see people go from a 15-year to a 30-year to lower their payment, and we see some going for a 30 to a 15 to get a lower rate."
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Matthew and Persis Dean, who live in Houston, got a 30-year mortgage in 2008 with an interest rate of 5.625%. Five years later, they refinanced into a 15-year loan with an interest rate of 2.75%.
"We decided to refi for 2 main reasons," Matthew Dean writes in an email:
- Got a raise, so had a little bit more disposable income.
- Interest rates were dropping.
"The reason we did a 15-year is because we could afford it -- with the interest-rate drop, we were only paying 15% more per month than previously what we were paying on a 30-year. The savings over the life of the house were too good to pass up."
Matthew Dean says the refinance was pain-free and didn't cost much. Three years later, he's glad they refinanced.
"Our personal financial situation has improved, so we have been lucky in that respect because we took a bit of a plunge with the higher payments."
Lower fees with a 15-year
There's another benefit to getting a 15-year mortgage: Fewer fees.
Fannie Mae and Freddie Mac charge fees, called loan-level price adjustments, that vary depending upon the borrower's:
- Credit score.
- Loan-to-value ratio.
- The type of dwelling.
- Other factors.
But in many cases, these fees are not charged on mortgages of 15 years or fewer. (Exceptions to this rule include cash-out refinances and investment properties.)
In many cases, loan-level price adjustments aren't charged as fees, but are transformed into slightly higher interest rates. Either way, the lack of these fees on 15-year mortgages tilts the field further in favor of 15-year mortgages.
Try Bankrate's calculator now to help you decide between a 15-year or 30-year mortgage.
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