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 15 years. Not to mention, current 15-year refinance mortgage rates are at an all-time low, so depending on when you secured your original loan, you should find yourself saving a substantial amount of money over the life of your loan.
How a 15- year fixed mortgage refinance works
15-year mortgages work similarly to any other fixed rate loan with one important difference — they take less time to go away that a traditional 30-year fixed mortgage. The only common fixed-rate term with lower terms than the 15-year is a 10-year. (There is also an 8-year fixed rate mortgage, but it can be difficult to find a lender who offers it.)
Every fixed rate mortgage operates similarly, the interest rate and monthly payment will remain the same over the fixed period of time, in this case, 15 years. The first part of the monthly payment goes toward interest. The rest of the payment gets applied to the principal balance. After each payment, the balance of the loan goes down, which means in subsequent months you’ll owe less interest. 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 more money to be applied to your loan balance, letting you pay it off faster. Here is an example:
A $200,000, 30-year mortgage at 5.25 percent carries a monthly payment of $1,104.41. $229.41 of the initial payments go to the principal (the first month only). A 15-year mortgage at the same rate would have a $1,607.76 initial payment, but apply $732.76 to the balance.
In other words, increasing your payment by 46 percent reduces your principal payment by 219 percent – that is the magic of a 15-year loan.
More advantages of a 15-year refinance
Because 15-year mortgages are a short loan, they carry less risk than a traditional 30-year refinance loan for the bank. This lower risk can come with more attractive terms – namely with interest rate.
If we use the same example listed above, a 30-year mortgage at 5.25 percent, you might be able 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.
While interest rates and the relationships between 30 and 15-year mortgage refinance 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 should always contact a loan broker to get an exact quote, though.)
Not too long ago, 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. Current 15 year refi rates are well below eight percent – which makes the best 15-yearr mortgage rates and programs even more attractive.
Imagine how much your life would change if your monthly mortgage payment ended 15 years earlier. What milestones you do want to save for? Would you use it to take an extravagant vacation every year, drive a dream car, save for retirement, save for your children’s college tuition? You get the point.
The best way to see how refinancing with current 15-yr refinance rates will benefit you is through the use of a mortgage calculator. You can compare your current loan terms with potential 15-year refinance changes. How will your monthly payment increase? How much will you save in interest over the life of your loan?
According to FRED, 15-year mortgage rates are at an all-time low (Photo/Wikipedia)
Disadvantages of a 15-year fixed mortgage
15-year mortgages can be a little bit harder to qualify for than a 30-year mortgage. 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. You’ll also need a credit score that proves your worthiness to a bank. These limits will vary from lender to lender, but it’s safe to assume you’ll need higher than a 620 score.
15-year loans also have a higher payment than 30-year loans. As we addressed above, this higher payment means that there is more money to be applied to your loan balance, letting you pay it off faster. But it also means you’ll need to be in a position where you can afford to rates.
It’s clear, if you are in a financial position to take on a 15-year mortgage, the advantages far outweigh the disadvantages.
Fixed rate mortgages vs. adjustable rate mortgages
Apart from the different loan lengths, all fixed-rate mortgages generally have the same benefits. You know how long your loan will last, and for what rate your interest will be.
The other type of loan to consider before refinancing is an adjustable rate mortgage. Their terms are even shorter than a 15-year fixed mortgage. But, these two types of refinancing mortgages are meant for two different buyers. Do you know the difference?
If you’re settled into your career, plan to stay in your home for an extended period of time, or just like security, a 15-year fixed rate mortgage is likely the right option for you. There are no surprises with this type of mortgage.
An adjustable rate mortgage begins with a lower interest rate for fixed period of time – usually 3, 5 or 10. After that period of time, the rate will adjust to the current market value. This option will allow you to pay lower interest, which will make your payments more affordable but is less secure after the initial period of time.
The best candidates for an ARM loan are:
- Those who plan to see an increase in income
- Anyone aiming to sell their home in the near future
- Anyone coming to the end of a current loan
- Someone who anticipates refi rates will stay consistently low in the years to come.
If these fit your situation, an ARM could be a better solution than a 15-year fixed mortgage.
How to take advantage of the lowest 15-year 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. This is a huge advantage for borrowers because you’ll have many lenders to decide between.
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.
It’s always helpful to work 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.
Deciding what’s right for you
Use a mortgage calculator. It’s always useful to equip yourself with possible scenarios for your financial situation before jumping into further research. Do you know about how much money you should expect to save? What are the target terms you’re looking for?
Shop around extensively, there are bound to be some exceptional offers out there. If you work with a broker they will be able to help you determine if a 15-year fixed mortgage is best for you based on your individual situation.