One of the best ways to take advantage of low interest rates is to refinance your 30-year mortgage to a 15-year mortgage. While doing this might not lower your monthly payment, it will do something even better — get your house paid off more quickly, letting you end up with no payment at all in just fifteen years.
How a 15 Year Fixed Mortgage Works
15 year mortgages work similarly to any other fixed rate loan with one important difference — they take less time to go away. Every fixed rate mortgage has a monthly payment which does not change over its life. The first part of the payment goes to pay that month’s interest. The rest of the payment gets applied to the principal balance. Since you paid off a little bit of the loan, next month you will owe less interest letting more of your payment go to the principal. Over time, the principal portion of your payment goes up while the interest portion goes down until you have completely paid off your loan.
15 year loans have a higher payment than 30 year loans. This higher payment means that there is more money to be applied to your loan balance, letting you pay it off more quickly. As an example, a $200,000 30 year mortgage at 5.25 percent carries a monthly payment of $1,104.41, with just $229.41 going to principal in the first month. A 15 year mortgage at the same rate would have a $1,607.76 payment, but apply $732.76 to the balance. In other words, increasing your payment by 46 percent gives you 219 percent more principal reduction. That is the magic of a 15 year loan.
15 Year Fixed Mortgage Rates
Believe it or not, 15 year refinance mortgages are even better deals than they may seem. Because they are shorter loans carrying less risk for the bank, they carry even lower interest rates than a traditional 30-year refinance loan. While interest rates and the relationships between 30 and 15 year rates can vary greatly, you can generally expect to pay between 20 and 30 percent less for a 15-year loan than you would for a traditional 30-year fixed rate mortgage. You can always contact a loan broker to get an exact quote, though.
Taking the above example, if a 30-year mortgage cost 5.25 percent, you could expect to find a 15-year loan around 4 percent. This would lead to an even lower payment of $1479.38–just 34 percent more than a 30 year loan’s payment.
How to Take Advantage of 15 Yr Refinance Rates
One of the great things about 15 year refinance and purchase mortgages are that they are very easy to find. Many lenders offer them, creating a competitive market. However, they can be a little bit harder to qualify for than a 30 year mortgage because of their higher payment. Since most lenders look at your debt-to-income ratio, you will need more income to qualify for a 15-year loan than to qualify for a 30-year loan.
Other than needing more income, the qualification process for a 15-year loan is similar to that for any other mortgage loan. You will need to have proof of income, bank statements and tax returns handy. Working with a qualified mortgage broker to identify and fix any credit issues before you start the process of applying for a loan will not only increase your chances of getting approved but can also get you a lower refinance rate by making you a more attractive borrower.
Saving Money with a 15 Year Refinance Mortgage
The most exciting thing about a 15-year loan is how much money it will save you. Because it carries a lower rate and you pay it off more quickly than a 30-year loan, you pay significantly less interest. The 30-year $200,000 loan at 5.25 percent will actually cost you $397,587. In other words, you will pay back almost twice what you borrowed. Going with a 15-year loan at low four percent refinance rates will cost you just $266,288 over the cost of the loan, saving you $131,299.
There is a deeper benefit that you realize by taking advantage of today’s low 15 year refinance rates, too. Imagine how much your life would change if you had 15 additional years during which you did not have to make a monthly mortgage payment. What could you do with an additional $1,000 or more of cash in your pocket every month? Would you use it to take an extravagant vacation every year, drive a dream car, save for retirement or do something else?
When mortgage interest rates were over eight percent, very few people could afford to take out a 15-year refinance. With today’s low rates, though, more people than ever can afford to take advantage of the benefits that a 15-year mortgage brings. To learn more about 15-year loans and their attractive interest rates, contact a qualified mortgage broker today.