Reasons to refinance into a 15-year mortgage

Many homeowners choose to refinance a 15-year fixed-rate mortgage to a fresh 30-year equivalent. While this may lower your monthly payment, it does add additional years to the total amount of time you will finance your home. It means you will pay more in real interest on the combined terms of your original loan and your refinanced loan than you might expect.

The main goal of refinancing into a 15-year mortgage

It may be rational to get a refi for a shorter period. Refinancing 30 year to 15 year fixed-rate loan can help you pay off your loan sooner and save you a lot of dollars that you would have to spend on interest. You will become the complete owner of your home and free yourself from mortgage debts earlier than you planned. In addition, shorter-term mortgages often come with lower interest rates. Consequently, most of your monthly payments will apply to the loan's principal balance.

However, a refinancing to a 15 year mortgage is not for everyone. Your monthly payment is likely to increase because the repayment is faster. To get a similar payment, you usually have to be in the last 10 or 12 years with a 30-year mortgage and refinance at an equal rate.) As a result, your budget can falter, especially if you have a fixed income or are retired. This extra money can bring more profit if you invest it in a business, for example. Tax deductions for interest on mortgage loans will also decrease.

This tactic can be attractive despite the higher monthly payment if you have sufficient cash flow. Good candidates to refinance to 15 year fixed are homeowners who have lived in their home for several years, have a stable monthly income that will allow them to increase their payment, and leave room for other expenses, including repairs, maintenance, and emergencies.

Advantages and disadvantages of refinancing into a 15-year mortgage

It's essential to know what is an advantage of a shorter-term (such as 15 years) loan? 

  • Interest rates on 15-year mortgages are lower than those on 30-year mortgages. This lower rate plus a shorter repayment period can save you tens of thousands of dollars (or more) in interest.

  • Paying off your mortgage quickly allows you to build your net worth faster. You can utilize this capital in the future with a home equity loan, a home equity line of credit (HELOC), or cash refinancing.

  • You can even reduce your monthly payments if the new rate is significantly lower than the current one.

Do not forget about some negative points of refinancing mortgage to 15 year:

  • A higher payment can cut your monthly budget. If you refinance on a 15-year loan and your payments increase, you should be able to afford this increase in addition to other obligations from month to month.

  • Higher pay can make it harder for you to make more valuable investments. If most of your monthly budget is spent on mortgages, you may have fewer contributions to your retirement plan, other investments, and savings for emergencies or debt repayment. In addition, getting other forms of credit, such as a car loan, can make it challenging because your debt-to-income ratio (DTI) will be high.

Refinancing involves a lot of paperwork and waiting, which can be inconvenient. Also, applying for a refinance to 15 year mortgage is like applying for a new loan, which temporarily hurts your credit score.

What to choose: 15-year or 30-year mortgage payments

If you're wondering: should I refinance to a 15 year mortgage consider how this will affect your finances. Assess your ability to pay monthly expenses and how a higher payment will affect your ability to pay off debt and invest, compared to keeping the remaining term of your existing 30-year mortgage.

If you plan to pay off your mortgage faster, you can achieve this by periodically making additional payments on your existing mortgage. Compare what's the best solution for you: refinance or pay extra. If you make enough extra payments over the life of the loan, you can easily shorten your loan time—even 15 years if you keep paying up front.

The trick to this tactic is that you can pay a higher interest rate on your current 30-year mortgage compared to a new 15-year loan. You will also face difficulties in managing, specifying, and sending additional payments that will need to be applied to the principal amount of the loan.

You can use Bankrate 15 year refinance. Its mortgage amortization calculator helps understand the effect of making extra payments (each month, annually, or once).

Enter the loan amount, term, and interest rate, then click the «Show Amortization Schedule» button, which opens a section that allows you to calculate the impact of additional payments.

There are several factors to consider when deciding whether to refinance from 30 to 15; including current interest rates, how long you want to live in your home, how many payments you have left, and whether you plan to prioritize other financial goals. Refinancing can save you a lot if you can afford a higher monthly payment when moving from your current 30-year loan to a lower rate 15-year loan.