Prior to the pandemic, 15-year mortgages were just too expensive for lots of American homeowners looking to refinance.
Instead, many opted for the popular 30-year fixed-rate loan, which typically came with a much more affordable monthly payment.
But the tables have turning: In September, 15-year mortgages accounted for 17% of home loan applications, up sharply from 10.2% a year earlier, according to a report from the Urban Institute.
Last year's plunging mortgage rates made the shorter-term loans more affordable. Now, with rates skyrocketing, the shorter-term loans are still looking like an attractive option.
The COVID connection
This recent shift toward shorter mortgage terms stemmed from the massive drop in rates caused by the ongoing COVID crisis.
Early in 2021, the average rate for a 15-year fixed-rate loan fell to an all-time low 2.16%, according to mortgage giant Freddie Mac.
Rock-bottom mortgage rates helped bring down the steep monthly payments that traditionally came with a shorter loan term, and gave homeowners opportunities to refinance into loans that may have been beyond their means before the pandemic.
Lately, rates have been flying high as the interest on Treasury bonds soars amid fears that vaccinations and stimulus checks will heat up the economy and stoke inflation. But mortgage rates are still low by historical standards.
How a shorter term can save you thousands
First things first: Even with mortgage rates much cheaper than a year ago, refinancing into a 15-year fixed-rate mortgage will generally give you a bigger monthly payment than refinancing to a 30-year loan.
Freddie Mac said 30-year fixed mortgage rates were averaging 2.97% last week, versus the 2.34% average for 15-year loans.
If you were to refinance a $200,000 balance at the current average rates, your monthly payment would be $1,319 with a 15-year loan, but only $840 with a 30-year mortgage — about a $480 difference.
That might be a deal breaker for some, but when you consider the lifetime interest you’d save with the shorter loan term, that high monthly payment might not seem so bad.
The total interest you’d pay by refinancing into a 15-year mortgage would be about $37,000, while you’d have to fork over roughly $102,400 in interest for the 30-year loan. That’s an extra $65,400.
And don’t forget that in addition to saving over $65,000, you’d also pay off your debt in half the time.
Why shorter terms have better rates — and what that means for you
The average interest rate on a 15-year fixed-rate mortgage is usually lower than the average on a 30-year loan because shorter loans are generally seen as less risky by lenders.
However, since a 15-year mortgage does require a higher monthly payment, the criteria needed to qualify for one is often stricter than for a 30-year loan.
You might ultimately decide the bar is too high and that you'll have to look for other ways to cut your housing costs — maybe by shopping around to find a lower rate on your homeowners insurance.
To land a 15-year mortgage, it may be necessary to raise your income above what you currently earn, reduce your debt-to-income ratio, or pump up your credit score by 20 points or more.
How refinance into a 15-year loan at the best rate
To ensure you’ll get the best rate possible on a 15-year refi, you’ll want to check in on your credit score before you start looking for offers.
You’ll need a score in the "very good" (740 to 799) or "excellent" (800+) range if you want lenders to feel confident about working with you.
If you haven’t been keeping tabs on your score lately, that's OK — there are online services that will let you check your score for free whenever you want, and give you tips on how to boost it if it’s low.
Once your credit score is ship-shape, you’ll want to shop around and compare quotes from at least three to five lenders before you commit to a 15-year loan offer.
Research from Freddie Mac has found that comparing five rates can save a borrower thousands of dollars over the life of a loan, so don't jump at the first offer you get.