Should I Refinance To A 15-Year Mortgage?

Refinancing to a 15-year mortgage instead of a new 30-year term can help you secure a better rate and pay significantly less interest over the life of your loan. You may also be able to pay off your mortgage sooner, but it isn’t the best option for everybody.

Here is a closer look at the advantages and disadvantages of a 15-year mortgage refinance.

How a 15-year Mortgage Works

Mortgages with a 15-year repayment term are paid off in half the time of a traditional 30-year home loan. Your monthly payment will most likely be higher, but in exchange, you can potentially save tens of thousands of dollars in total interest during the loan’s term.

Like a 30-year fixed mortgage, a 15-year fixed mortgage carries the same interest rate for the life of the loan. Therefore, your mortgage payment remains the same, although the escrow payments for property taxes and homeowners insurance can fluctuate.

When you refinance, you’ll replace your existing loan with a new mortgage. You’ll receive a new rate, monthly payment and amortization schedule.

Pros and Cons of Refinancing to a 15-year Mortgage

There are several advantages and disadvantages to consider before you refinance to a 15-year mortgage.

Pros of Refinancing to a 15-year Mortgage

• Pay less interest. Since you have fewer payments, your total interest costs should be lower than if you were to choose a 30-year term.
• Become mortgage-free sooner. Fewer payments also gives you the chance to own your home outright sooner.
• Take advantage of equity benefits. The accelerated repayment timeline means you will have more home equity sooner. With a cash-out refinance, you can tap this equity and use it to achieve various financial goals such as buying an investment property or funding home improvements.
• Switch to a fixed interest rate. Refinancing gives you the opportunity to switch from an adjustable-rate mortgage to a fixed-rate loan so that you can enjoy a consistent monthly payment.
• Avoid mortgage insurance premiums. If you have a home loan from the Federal Housing Administration (FHA) and are eligible to refinance, refinancing into a conventional 15-year mortgage can eliminate your ongoing mortgage insurance premiums. Make sure you have at least 20% equity in your home to avoid private mortgage insurance (PMI) on your conventional loan.

Cons of Refinancing to a 15-year Mortgage

• Pay more monthly. Because your new loan comes with a shorter repayment timeline, your mortgage payment will be higher, leaving you with less money for savings and other expenses. Instead, you may consider a 20-year term, which balances the benefits of 15-year and 30-year mortgages.
• Closing costs still apply. Refinancing a mortgage has closing costs similar to your original purchase loan. Fees can range from 2% to 5% of your loan amount. Keeping your existing mortgage and making extra mortgage payments can produce similar results if the fees of refinancing exceed the potential interest savings. Just make sure you’re aware of any prepayment penalties your lender may impose before you decide to refinance or pay off large chunks of your mortgage.
• Requires a home appraisal. Many borrowers must undergo a home appraisal to accurately calculate the property value and current home equity. However, there are some ways to refinance without an appraisal.
• Underwriting process can be lengthy. Most refinances take up to 45 days to complete and likely won’t be a quick solution to immediate financial problems.
• Refinances the entire loan. A mortgage refinance replaces the interest rate for your entire loan amount, which usually doesn’t benefit homeowners when rates are rising. A home equity loan might be a better option for tapping your available equity—as opposed to a cash-out refinance—because your current mortgage terms stay intact, and you may be able to avoid paying certain closing fees.

How to Refinance to a 15-year Mortgage

The mortgage refinance process is almost identical to buying a home, but the process may be simpler depending on what loan you choose. For instance, streamline mortgage refinances tend to have less paperwork and may not require a home appraisal.

1. Compare rates: First, get quotes from several mortgage refinance lenders to compare rates and estimated closing costs. See if your current lender offers reduced lender fees if you want to refinance through them.
2. Gather initial paperwork: Your lender will request the same credit, income and personal details as when you applied for your original loan. Additional information may be required for government-backed programs such as VA loans or USDA loans.
3. Undergo a home appraisal: Unless you’re doing a streamline refinance, you will most likely need a complete home appraisal when applying for a conventional refinance or cash-out refinance.
4. Close on the loan: Once the underwriting process is complete, it’s time to sign the final documents and start making payments under your new loan. Closing costs are due up front but your lender may let you roll them into the monthly payment.

How to Find the Best Rate for a 15-year Mortgage

Comparing 15-year mortgage rates from at least three to five lenders is an excellent first step to finding the best rate. In addition, you’ll want to do the following:

• Improve your credit score. A good credit score of 670 or higher can help you qualify for lower rates.
• Lower your debt-to-income (DTI) ratio. A DTI below 43% is desirable, although lenders can have different requirements.
• Consider different refinance programs. For instance, you may receive a better rate by opting for a VA loan instead of a conventional loan.
• Go for a rate-and-term refinance. Rate-and-term refinances typically offer lower refinance rates than a cash-out refi as you’re not increasing your total loan size.
• Do your homework. Pay attention to current refinance rates and market trends so that you’ll know a good rate when you see it.
• Lock your rate. Once you’ve found a good rate, make sure to lock it in to avoid any fluctuations. Lenders typically allow you to lock in a rate for at least 30 days.

15-year vs. 30-year Mortgage Payments

The best mortgage refinance length ultimately depends on if you can afford the monthly payment. Here are a couple examples of the difference in monthly payments and total borrowing costs between a 15-year mortgage and 30-year mortgage.

Payment Examples for a $400,000 loan

Payment Examples for a $250,000 Loan

As a reminder, you can always decide to refinance into another 30-year term. While you’ll pay more lifetime interest if you follow the standard repayment schedule, most lenders allow you to make extra payments penalty-free. A mortgage payoff calculator can demonstrate your potential savings if you think you’ll be able to pay your balance off early as your finances improve.

Related: Mortgage Refinance Calculator