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Should you refinance into a 30-year or 15-year mortgage during COVID-19?

Doug Whiteman
Should you refinance into a 30-year or 15-year mortgage during COVID-19?

As part of the economic fallout from the coronavirus pandemic, the floor has dropped out from under mortgage rates. They keep falling to new all-time lows, and homeowners have been rushing to refinance.

Mortgage refi applications have been piling in at around double what lenders were seeing last year at this time.

If you're a homeowner with a 30-year mortgage and think you could benefit from refinancing, it's natural to want to pull the trigger on another 30-year loan.

You'll shrink your monthly payment, possibly by hundreds of dollars, which is a great way to give your budget some breathing room during this time of economic stress.

But in the process, you'll raise your overall costs — often substantially.

Personal finance personality Suze Orman says it's wiser to refi into a 15-year loan. "Do not refinance and extend your years," she said recently, in an interview with People.

Yet other experts say choosing the shorter-term loan is not a smart idea — especially not during the current crisis.

See the arguments on both sides to help you decide whether a 30-year or 15-year refinance is the right choice for you.

The advantages of refinancing into another 30-year mortgage

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If you swap out an older 30-year fixed-rate mortgage for a brand-new one, you're likely to score a much lower mortgage rate and slash your monthly housing costs.

Thirty-year mortgage rates have plunged to an all-time-low average of 3.13%, according to mortgage company Freddie Mac. One year ago, the average was 3.73%, and two years ago it was 4.55%.

"The cost to borrow has never been cheaper for homeowners," says Grant Moon, the founder and CEO of the real estate technology company Home Captain.

Fifteen-year fixed-rate mortgages come with even lower rates than 30-year loans: currently an average 2.59%, down from 3.16% a year ago and 4.04% at this time in 2018.

But Moon says you're better off choosing a 30-year mortgage for a refinance in the current environment, because 15-year loans come with much stiffer monthly payments.

"Your payment would likely go up, and with uncertainty around the economy with 30 million people [receiving unemployment benefits], it could be a dangerous proposition if a borrower were to lose their job and be stuck with a higher payment amount," he says.

Use a mortgage calculator and you'll see that a $250,000, 30-year fixed-rate mortgage at 3.13% has a monthly payment of about $1,071. The same size mortgage for 15 years at 2.59% has a steeper payment: close to $1,700.

The advantages of refinancing into a 15-year mortgage

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For borrowers who can manage the higher payments, 15-year mortgage refinances have benefits, says Richard Pisnoy, a principal with Silver Fin Capital, a mortgage broker in Great Neck, New York.

"Not only will they be paying a lower interest rate on the loan, but they will reduce the number of years on the loan, thus saving an enormous amount of interest," Pisnoy says.

With the 15-year mortgage in the earlier example — in the amount of $250,000 and at 2.59% interest — the interest costs would be about $52,000 over the life of the loan.

The 30-year mortgage in the same amount at 3.13% interest would have much higher lifetime interest costs: about $136,000.

Suze Orman says consider the interest burden for a hypothetical homeowner who has been paying on a 30-year fixed-rate mortgage for 14 years.

"Now you decide to refinance and you take out a fresh 30-year mortgage," she writes, on her blog. "Sure, the new mortgage is at a lower interest rate, but you just extended your mortgage-payment on this home to 44 years! That’s 44 years of interest payments."

Making your choice

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But Moon, of Home Captain, doubts there are many homeowners sitting on mortgages that are more than a decade old.

"The U.S. refinance boom started last May, and many of those who have been eligible to refinance — or it made sense for them to do that — have already refinanced," he says.

Your decision on the term for your mortgage refinance loan ultimately comes down to how confident you feel about your current financial situation.

Fifteen-year mortgages have financial pluses, but they can be risky, Pisnoy says.

"The borrower needs to understand what the impact of a larger monthly payment will do to their cash flow and any financial impact this will have on them should they lose any monthly income they currently have," he says.

If you refinance into a 15-year home loan and the payments become too much, you can't just start sending your loan servicer 30-year-size payments. That won't fly.

Going with another 30-year mortgage and its lower monthly payments can be the smarter move, particularly if you're not likely to stay in the house for the long haul. If you may be moving out within a few years, what does it matter if you have a 30- or a 15-year loan?