Refinancing To A 15-Year Mortgage: The Pros And Cons

There are several reasons you may want to refinance your mortgage. It can give you the ability to change the type of loan you have or use some of the equity you’ve built up in your home. If you’re a homeowner looking to pay off your home sooner, refinancing can even allow you to change your loan term from a 30-year loan to a 15-year loan.

Refinancing to a 15-year mortgage may get you to the finish line faster, but knowing how it works and the financial commitment you need to make to get there is important.

The main difference between a 15- versus a 30-year mortgage is how long it’ll take you to pay off the loan. As the names suggest, a 15-year mortgage takes 15 years, while a 30-year mortgage takes 30 years.

With a shorter loan term, borrowers save money in the long run, but you’ll have higher monthly payments. And, as with many refinances, you’ll also have to pay closing costs to refinance from 30 to 15 years.

How To Know If A 15-Year Mortgage Refinance Is Right For You

It’s important to know that everyone’s situation is different and that a refinance may not be the best option for you at this time. The best way to determine if it’s a good time to refinance to a 15-year loan is to speak with a mortgage expert who can review your information. They’ll help you know if it’s the right loan, or they may suggest alternative home loans that may be a better fit for your financial goals.

Mortgage refinance rates can change daily. The economy, inflation, international political climate and the housing market can all impact rates. To combat unprecedented rising inflation rates, the Federal Reserve raised its federal funds rate about 5.25% in the last 2 years, in turn raising mortgage rates. However, the Fed recently voted to the keep the federal funds rate at it’s current level, which is a good sign that rates may have plateaued and could actually begin slowly dropping in the future.

Factors That Affect Your 15-Year Mortgage Refinance Rate

It’s important to remember, too, that your specific interest rate will also depend on your credit score, the amount of money you borrow and the location of your home. That means you may have a different mortgage rate than another person who gets the same type of loan.

If you had bad credit and have improved your credit score, refinancing might be a good option. You might get a better rate now even if general interest rates are higher.

If your circumstances have changed, now may be a good time to refinance your home loan. But should you refinance to a 15-year mortgage? Consider the pros and cons before deciding.

The Pros

Other than owning your house free and clear sooner, there are additional benefits to a 15-year loan.

Less Interest Paid

You’ll be paying your mortgage for half the time you would with a 30-year mortgage. Because you aren’t paying interest for those additional years, you’ll save a lot of money on interest.

Lower Interest Rate

Lenders typically offer lower interest rates with shorter mortgage terms because they are taking on less risk. Because of this, a 15-year mortgage will tend to have a lower interest rate than a 30-year mortgage. This means you’ll have to pay less total interest over the life of the loan at a lower interest.

More Equity Sooner

You’ll also build equity in your home faster because you’re paying more toward your loan each month. Having equity in your home allows you to build long-term wealth. You’ll also be able to pocket more money in the event that you sell your home in the future or utilize your home equity in the event that you need cash.

Access To Equity Sooner

With more equity in your home, it may be easier to refinance again and access the money for needed repairs, debt consolidation or for other financial needs. You could qualify for home loans like a cash-out refinance or a home equity line of credit, known as a HELOC.

Refinance To A Fixed Rate

If you have an adjustable-rate mortgage, refinancing to a 15-year mortgage is also an opportunity to choose a fixed-rate mortgage. Having an interest rate that doesn’t fluctuate with the current market means you have more control over your finances.

The Cons

If you refinance to a 15-year mortgage, you could save money in the long run. However, if the upfront costs and higher monthly payments leave you cash-strapped for the foreseeable future, it may not be worth it – or possible for you right now. Let’s look at some refinancing cons for borrowers:

Upfront Costs

Future savings are great, but it costs money to refinance your loan. The cost to refinance includes an application fee, appraisal fee, title search, insurance and attorney fees, if necessary. On average, you should expect to pay around 2% – 6% of your loan amount. The exact closing costs will depend on your loan, lender and where you live.

Higher Monthly Payments

Refinancing to a 15-year mortgage shortens the amount of time you have to pay off your home That means your mortgage payments will be higher. Before you refinance to a 15-year mortgage, you’ll want to make sure your new mortgage payments fit comfortably in your budget. You may want to consider the 28% rule, which states that your mortgage payment should be no more than 28% of your gross monthly household income.

Missed Opportunity

Depending on your financial situation, the more money you put toward mortgage payments, the more financial opportunities you may miss elsewhere. That includes investing, saving for retirement, building an emergency fund or saving for a large future purchase.

You may be wondering exactly how much you’ll save by refinancing your home. We’ll take a look at an example to demonstrate your long-term savings.

Let’s say that you currently have a 30-year mortgage for $150,000 that you’ve been paying for 5 years. You have 25 years left on the mortgage and you still owe $140,735.21. Your current loan interest rate is 6.7% and your current monthly mortgage payment is $967.92, not accounting for insurance and taxes. For the remainder of the loan, you’d pay a total of $149,639.87 in interest.

You decide to refinance to a 15-year mortgage with a new interest rate of 5.9%. Your loan balance remains at $140,735.21 and your new monthly mortgage payment is $1,180.01. To refinance your loan, you also need to pay approximately $2,814 – $8,444 in closing costs (2% – 6% of your loan balance). For this loan, you’d pay a total of $71,667.26 in interest, less than half the interest you pay with a 30-year mortgage.

If you plan to live in the home for more than a few years and can comfortably make the higher monthly payment and pay the closing costs, it may be worth it to refinance. Even in the event that you refinance and closing costs are the higher $8,444 in the example above, you’d still save more than $69,000 in interest over the life of the loan.

Let’s go over some of the most frequently asked questions regarding refinancing to a 15-year mortgage.

When should I refinance to a 15-year mortgage?

After weighing the pros and cons of refinancing to a 15-year mortgage, you should also think about whether it’s the right time to refinance. Here are a few signs it may be advantageous to refinance to a 15-year:

• You’ve had an income increase since your initial loan approval.
• Your credit score has increased since your initial loan approval.
• Interest rates are lower than your current mortgage rate.
• You’re able to afford a higher payment.
• You have more than 15 years left on your mortgage.

What documentation will I need to refinance to a 15-year mortgage?

As with any loan, you’ll need to show proof of income, such as your W-2s or recent pay stubs. You’ll also need to show your current insurance policy to prove you’re covered, and you may be required to have the home appraised.

Most mortgage lenders will also consider your debt-to-income ratio (DTI), the amount of equity you have in the home and how long your name has been on the title of your home.

What credit score do I need to refinance?

At Rocket Mortgage^®, you’ll need a credit score of at least 620 and a maximum loan-to-value ratio (LTV) of 95% to refinance a conventional loan. However, credit score requirements may vary slightly depending on your lender.

If your credit score is at least 580, check with your lender to see what your options are. You may be able to still qualify for other options, such as a Department of Veteran Affairs (VA) or Federal Housing Administration (FHA) loan.

Are interest rates higher for a 15-year mortgage?

In general, interest rates for a 15-year mortgage are lower than those for a 30-year mortgage. That said, your monthly mortgage payments will be higher. However, the end result is that you’ll pay off your mortgage more quickly and save money over the life of the loan.

Refinancing to a 15-year mortgage can allow you to own your home free and clear faster and save money on interest. However, there are upfront costs and higher monthly mortgage payments that come with it.

If you’re in a good financial place and you’re motivated to pay off your loan, refinancing to a 15-year mortgage may be a good option for you. If you’re ready, you can start the refinancing application process with Rocket Mortgage today.