Should I Refinance to a 15-Year Mortgage?
If you’re considering a refinance to a 15-year mortgage, you’re probably hoping to save money on interest charges and build home equity faster. These are some of the best refinancing perks, but there are tradeoffs. For starters, you’ll have to pay upfront fees to refinance and, in many cases, commit to a higher monthly payment.
Read on to understand the pros and cons of refinancing to a 15-year mortgage and how to decide if a 15-year refinance is right for you.
- Refinancing to a 15-year mortgage can potentially cut your total interest costs significantly if you’re able to get a lower interest rate.
- Refinancing to a shorter term loan isn’t free — you’ll likely pay thousands of dollars in closing costs and face higher monthly mortgage payments.
- If you weigh the pros and cons and refinancing isn’t for you, you can still reduce interest costs and pay off your mortgage sooner by making extra monthly payments.
Should you refinance to a 15-year mortgage?
Refinancing to a 15-year mortgage can save you hundreds of thousands of dollars over the life of your loan, according to LendingTree data. But before you can reap this benefit, you need to ask yourself:
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Can I afford higher monthly mortgage payments?
On average, you’ll spend $572 more on monthly payments compared to a 30-year fixed mortgage, according to a LendingTree analysis of about 381,000 loans offered to users of our online lending marketplace. -
Do I have the cash to cover refinance closing costs?
You can expect to pay between 2% and 6% of your loan amount in refinance closing costs. For example, refinancing a $300,000 mortgage could cost between $6,000 and $18,000. -
Will I get a lower interest rate?
If you locked in your mortgage rate before the COVID-19 pandemic, odds are you have a rate that’s significantly lower than current mortgage rates. It usually only makes sense to refinance if you can get an interest rate that’s at least 0.50 percentage points lower than your existing rate. -
How long do I plan to stay in my home?
A refinance can save you money, but it takes time for those savings to build. Before you make a decision, learn how to calculate and interpret the break-even point on your refinance.
When to refinance to a 15-year mortgage
The new interest rate is at least 0.50 percentage points lower than your current rate
The new, higher monthly payment won’t strain your budget
You’ll keep the house long enough to break even on the refinance
Pros and cons of refinancing into a 15-year mortgage
Pros
- Interest rates on 15-year mortgages are typically lower than those on 30-year mortgages, and you’ll pay less interest over the life of the loan.
- Refinancing to a 15-year mortgage can help you eliminate private mortgage insurance (PMI) sooner or even altogether.
- Because you’re paying off a greater portion of the principal balance each month, you’ll build equity more quickly.
Cons
- Cutting your mortgage term in half typically results in higher monthly payments, which could strain your budget.
- Along with refinancing comes closing costs, which typically range from 2% to 6% of your loan amount.
- Putting money toward refinancing could mean missing out on other opportunities that may provide greater returns.
Interest savings
One of the biggest pros of refinancing to a 15-year mortgage is how much you can save on interest charges. Interest rates for 15-year mortgages are often lower than comparable 30-year options.
With that lower interest rate, not only are you paying a smaller overall percentage to the lender, but you’ll also pay less total interest over the life of your loan.
Use a mortgage refinance calculator to estimate how much you can save by choosing a 15-year mortgage.
What are current 15-year refinance rates?
Current average 15-year mortgage refinance rates are 6.05%.
Current average rates are calculated using all conditional loan offers presented to consumers nationwide by LendingTree’s network partners on the previous day for each combination of loan type, loan program, and loan term. Rates and other loan terms are subject to lender approval and not guaranteed. Not all consumers may qualify. See LendingTree’s Terms of Use for more details.
The amount you stand to save will, of course, depend on your exact situation. But here’s an example to give you some ballpark figures.
| Your current 30-year mortgage | After 5 years, you refinance to a 15-year mortgage |
|---|---|
| Original mortgage balance: $350,000 Original interest rate: 6.60% 30-year mortgage payment: $2,235.31 | Mortgage balance: $330,551 15-year mortgage interest rate: 5.90% 15-year mortgage payment: $2,867.97 ($632.66 per month more than the 30-year loan) |
| Total interest saved by getting a 15-year loan now: $185,124.40 | |
Here’s how much you could save by choosing a 15-year mortgage versus a 30-year loan:
| 15-year mortgage | 30-year mortgage |
|---|---|
| Loan amount: $350,000 Interest rate: 5.90% Monthly payment: $2,934.62 | Loan amount: $350,000 Interest rate: 6.60% Monthly payment: $2,235.31 |
| Total interest paid: $178,232.18 | Total interest paid: $454,710.11 |
As you can see, you would save around $276,480 by choosing a 15-year mortgage, and your monthly payments would be about $700 higher.
Insurance savings
Even if you’re making PMI payments on a conventional loan, you can still refinance and potentially get rid of those PMI payments — as long as you’ve built at least 20% home equity.
- If you don’t yet have 20% equity in your house, a 15-year loan term will help you reach that point more quickly and allow you to remove that extra cost sooner.
- If your home’s value has appreciated since you took out your mortgage, that appreciation can count as equity when you refinance.
For example, if you made a 10% down payment on a $200,000 home that you’ve had for five years, and your house appreciated by 8%, you should have more than 20% equity in your house now. If you refinance your house and don’t take cash out, you likely won’t be required to pay PMI.
Quick answer: If you can save money on mortgage insurance premiums, it may make sense to switch to a conventional mortgage — even if you’d have to pay PMI. That’s because PMI payments often stop much sooner than FHA MIP payments.
If you have an FHA loan backed by the Federal Housing Administration, you must pay ongoing FHA mortgage insurance, also known as an annual mortgage insurance premium (MIP). However, if you refinance from an FHA loan into a conventional loan, you’ll often be switching from making those MIP payments to making PMI payments. (That is, unless you’ve reached 20% equity in your home).
Here’s how these different mortgage insurance costs stack up:
| FHA loans | Conventional loans |
|---|---|
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Learn more about your options when refinancing with a government refinance program.
Adjustable-rate mortgages (ARMs) are mortgages with interest rates designed to fluctuate with the movements of the broader market. They can be a good choice when the market offers high interest rates and when it seems likely that rates may decrease in the future. However, because it’s impossible to predict the market with certainty, ARMs can also cause emotional and financial strain — also known as “payment shock” — when monthly payments increase.
The takeaway: An ARM can save you money, but it can also become more expensive over time. Be sure to read the Consumer Financial Protection Bureau’s handbook on ARM loans so you’ll know exactly what you’re committing to.
Equity gains
Home equity is the difference between what you owe on your mortgage and what your home is worth. The more equity you have, the better, since a large amount of equity in your house means:
- You’ll own your house outright sooner. A 15-year mortgage means you’ll be debt-free in half the time of a 30-year mortgage.
- You’ll have a more secure investment. Even if the market dips, you’ll likely be safe from having an underwater mortgage.
- You’ll have access to cash at competitive interest rates. Second mortgage loan rates are typically much lower than personal loans, credit cards or other similar options. These loans convert a portion of your home equity to cash:
Higher monthly payments
Condensing your 30-year mortgage into a loan term that’s half the length typically means that your monthly payment will increase. This may not be a problem if you’re spending less and earning more — maybe you’ve paid off a big auto loan or student loan balance. But if your financial situation hasn’t changed much, committing a higher percentage of your income to a set payment each month means you’ll have less financial flexibility.
Depending on the interest rate you qualify for, the equity you’ve built in your house and other factors, you may have a bigger or smaller payment after your 15-year mortgage refinance. It’s more common, however, for your payments to increase than it is for them to drop.
Refinance closing costs
Your closing costs depend on a number of factors, including your loan size, lender, location and mortgage program. In general, mortgage refinance closing costs typically range from 2% to 6% of the loan amount.
That can be a lot to pay out of pocket, though some lenders offer the option to roll some or all of these closing costs into your new mortgage. The biggest drawback to doing this is that you’ll pay interest on the amount you financed. However, financing your closing costs can help you avoid draining your cash accounts or, even worse, raiding your retirement savings.
Opportunity costs
“Opportunity costs” are the potential advantages you’ve missed out on by choosing a specific path. If you choose to refinance to a 15-year loan, you’d have to commit more money toward a mortgage — either in the form of closing costs or higher monthly payments, or both. That means missing out on other things you could’ve done with that cash. For example:
- Investments with a higher return than homeownership, like stocks or peer-to-peer loans.
- Tax-advantaged investments, like a 401(k), individual retirement account (IRA), health savings account (HSA) or 529 college plan.
- Paying down debt that has a higher interest rate than your mortgage.
- Enhancing your quality of life with fun activities like vacations, dining out or making home improvements.
Before you make a big move toward paying off your mortgage — like refinancing into a 15-year loan — be sure that it’s the best use of your money. If putting more funds toward your mortgage is going to lead to increased credit card or personal loan debt, reconsider refinancing.
How to refinance to a 15-year mortgage
- Assess your goals. Start by asking yourself what you hope to accomplish by refinancing, and explore the various strategies and programs to help you achieve your goals. Reach out to a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD) for additional guidance.
- Shop around. Don’t simply stick with your current lender. Borrowers who shop around for a mortgage save thousands of dollars in interest, according to LendingTree data. Get loan estimates from at least three to five lenders to make sure you’re getting the best deal.
- Weigh the pros and cons. While a 15-year refinance may save you a significant amount of interest over the life of the loan, make sure you can comfortably afford the new monthly payment and the closing costs. Also, consider whether those funds might have greater returns if invested elsewhere.
- Lock in your mortgage rate. Once you’ve chosen a lender, ask it to lock in the offered loan rate. Most lenders will lock it in for 60 days, though you may get a better rate with a shorter lock period.
- Prepare for closing. At least three days before your closing, your lender will send you a closing disclosure detailing your loan terms. Review it closely to make sure everything is correct. You have up to three business days after the closing to cancel the refinance without any penalty if you change your mind.
Alternative to mortgage refinancing: Making extra payments
If your goal is to save on interest, there’s more than one way to do it. Aside from a 15-year refinance, you could regularly make extra payments toward your principal balance. The advantage of doing this is that you retain a low minimum monthly payment — so you have some flexibility in your budget if needed — and you still pay off your loan faster.
Example: Making extra mortgage payments
Let’s say you’ve been making payments on your 30-year fixed-rate, $315,000 mortgage for five years at a 4% interest rate. Your current loan balance is around $288,000. If you pay an extra $1,400 each month, you could cut your total interest paid by about half and effectively have a 15-year loan payoff — with no additional closing costs.
Learn more about how (and when) to pay off your mortgage early.
Frequently asked questions
Yes, if you meet the qualifications, you can refinance a 30-year mortgage to a 15-year mortgage. Requirements vary by lender and program, but in general, eligibility and the accompanying interest rate offered depend on your credit score, income and DTI ratio.
Closing costs vary depending on your loan size, where the property is located, the lender and the mortgage type. In general, though, you can expect to pay between 2% and 6% of the loan amount.
The credit score you need to refinance to a 15-year loan varies by lender and program. To get the best interest rates, however, you’ll usually need a 780 credit score or higher.
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