Refinancing to a 15-year mortgage: What to consider
Key takeaways
- Refinancing from a 30-year mortgage to a 15-year mortgage can save you a significant amount of money in interest and pay off your mortgage sooner.
- While a 15-year mortgage comes with a higher monthly payment, it also helps you build equity and eliminate mortgage debt faster.
- Shop around and compare rates from different lenders to find the best 15-year loan offers.
When mortgage rates decline, more homeowners look to refinance, sometimes to 15-year loans. A 15-year mortgage can set you on the path to build equity faster and pay off your loan sooner, potentially for less interest — but it comes with downsides, as well. Let’s break down whether refinancing to a 15-year mortgage is right for you.
Should you refinance into a 15-year mortgage?
Before refinancing to a 15-year mortgage, consider:
- Have you had your current mortgage long enough to refinance? Most lenders require a certain amount of time to pass before you can refinance to a new loan — a period known as “seasoning.”
- Can you afford the higher monthly payment? If you’re refinancing to a 15-year loan from a 30-year loan, your monthly payment could go up — even with a lower balance overall — because you’re paying back the new loan in half the time.
- Will you remain in your home long enough to break even? Refinancing comes with closing costs. Even if you’re refinancing to a lower rate, it could take up to a few years to recoup the cost of those upfront expenses.
- Will a higher monthly payment get in the way of other financial goals? Will you have enough cash flow to still maintain an emergency fund, save for retirement and meet other financial milestones?
- How secure is your income? A shorter-term mortgage means more expensive monthly payments and a tighter repayment timeline. Could those aspects pose a problem if you were to lose your income?
- Is it better to simply pay more on your current mortgage? If getting free and clear of your mortgage is the main goal, you could accomplish that with extra payments towards your principal. You won’t get a new interest rate or term, but you’ll save yourself from applying for another loan.
Pros of refinancing to a 15-year mortgage
- Lower interest rate: The interest rates on 15-year fixed loans are lower than those on 30-year mortgages. That lower rate, plus a shorter repayment period, can save you tens of thousands (or more) in interest.
- Build equity faster: Paying off your mortgage at a faster pace allows you to build equity more quickly. You can tap that equity in the future via a home equity loan, home equity line of credit (HELOC) or cash-out refinance.
- Potential to reduce monthly payments: If your new rate is significantly lower than the existing rate, you could have a lower monthly payment.
Cons of refinancing to a 15-year mortgage
- Potential for higher monthly payment: Because 15-year loans are shorter, your monthly payment could increase. You’ll need to be able to afford that on top of other obligations month to month.
- Closing costs: If you can’t afford the closing costs of a 15-year refi upfront, you won’t save as much as you hope to.
- Other costs: The process to refinance involves paperwork and waiting, which can be inconvenient. In addition, applying for a refinance temporarily lowers your credit score.
- Less money for other things: Homes are an illiquid asset, meaning you can’t easily turn them into cash. Aside from that risk, if more of your budget is going to a higher 15-year payment, you might have less to contribute to a retirement plan, other investments and emergency savings, or paying down debt. If you’re overleveraged, that can make it harder to qualify for other forms of credit, too.
How much you could save refinancing to a 15-year mortgage
Refinancing is all about the numbers. Let’s say our borrower took out a 30-year, $265,000 mortgage in 2019 at 3.9 percent. Fast-forward five years to today: Mortgage rates are now in the 6s. Could our borrower save by refinancing to a 15-year term — even at the higher rate?
| Balance | Loan term | Interest rate | Monthly payment | Interest paid over term | Interest savings over term |
|---|---|---|---|---|---|
| $265,000 | 30 years | 3.90% | $1,250 | $184,971 | $0 |
| $238,351 | 15 years | 6.15% | $2,031 | $127,176 | $57,795 |
In this scenario, the borrower could save considerably on interest (less closing costs) by refinancing to a 15-year loan and paying about $780 more per month. If your budget has that flexibility and you’re set on shedding your mortgage five years sooner compared to sticking with the 30-year loan, refinancing could make sense for you.
Now, let’s say rates decreased from 2019 rather than increased. Here’s how the above example might play out:
| Balance | Loan term | Interest rate | Monthly payment | Interest paid over term | Interest savings over term |
|---|---|---|---|---|---|
| $265,000 | 30 years | 3.90% | $1,250 | $184,971 | $0 |
| $238,351 | 15 years | 3.5% | $1,703 | $68,328 | $116,643 |
In this case, our borrower would still be making a higher monthly payment, but not as high as the higher-rate scenario. Our borrower would also save more than $115,000 in total interest.
Bottom line: When is it a good idea to refinance to a 15-year mortgage?
In general, it is a good idea to refinance to a 15-year loan if:
- You can get a lower rate than your current mortgage rate, ideally by at least a half to three quarters of a percentage point.
- You’ll be in your home long-term.
- You can afford the higher monthly payment.
- Your credit score or income has increased since you were first approved for your loan.
- You have 15 (or more) years remaining on your mortgage.
