You can get a lower rate and pay off your mortgage faster, what’s not to love about the 15-year mortgage? It just makes sense to refinance into it from a 30-year loan, right?
Not always. Yes, you may save a lot of money on interest. Cutting your loan term in half is big. But, is it worth it?
Keep reading to find out.
You’re Payment Will Increase – Can you Afford It?
You have to consider your budget. You are going to pay less interest over the life of the loan, but you are also going to pay more principal with each payment. You just cut your loan from 30 years to 15 years. That means you have to pay more principal to pay the loan off in half the time.
This may be ideal if you have the income to support the higher payment. Take a close look at your budget. Do you have a lot of disposable income? What happens when you increase your mortgage payment? Do you still have adequate disposable income? (Disposable income is the money you are free to spend after paying your bills).
Do you have other debts that you will ignore by taking the higher mortgage payment? Credit card and personal loan interest payments are often much higher than mortgage interest. You aren’t doing yourself any favors by staying in debt with these types of loans just to pay off your mortgage faster. Instead, you may want to pay those debts off first. You can then focus on your mortgage.
Do you have retirement funds set up already? Do you regularly invest in those funds? If not, taking the higher mortgage payment may not be the best choice. Sure, you’ll own your home free and clear, but you won’t have retirement money. You’ll end up having to sell your home just to have funds to live off of, but then where do you live?
Will You Save Enough in Interest?
If you have decent credit and a low debt ratio, chances are that you will secure a low interest rate on your 15-year term. This in combination with the shorter term will help you save a great deal on interest charges.
For example, let’s look at a $200,000 at 4% on a 30-year loan and the same loan at 3.5% on a 15-year term.
- 30-year payment $955 with total interest paid of $143,739
- 15-year payment $1,430 with total interest paid of $57,357
That’s a savings of more than $86,382 over the life of the loan! Even if you got the same interest rate of 4%, you’d still save $77,400. This isn’t the case for everyone, though. Don’t just assume you’ll save money. Do the calculations. Ask your lender what the interest costs are over the life of the loan and compare it to what you would pay on your current loan.
Remember, refinancing costs money. You aren’t going to get a 15-year loan free of charge. You’ll pay origination fees, processing fees, title fees, appraisal fees, and more. The costs could add up to several thousand dollars or more, so you’ll need to keep that in mind.
Is Your Income Stable?
Something you really want to look at is your income stability. With a 15-year payment, you are required to make the higher payment no matter what is going on in your life. As you saw in our above example, the payment can be as much as $550 or more higher than your current payment. That’s no small chunk change.
What happens if you lose your job or your income decreases? Are you on a variable income basis? Maybe you work on commission or bonus. That isn’t the ideal type of income when you are thinking about raising your mortgage payment.
Instead, you have another option. You can keep the 30-year term but make 15-year payments when you can afford it. This way if things get tough financially, you are only responsible for paying the 30-year payment. You can get back on with the 15-year payments when things are stable again. You don’t risk your good credit and you don’t put your home at risk of foreclosure.
If you need flexibility, we don’t recommend refinancing out of a 30-year term into a 15-year term. If you have the money and can comfortably cover the cost of living and savings, then refinancing into that shorter term stands to save you a great deal of money. As with any loan, make sure you read the fine print and really think the process through. Is it worth refinancing or can you just make the larger payments on your own? Either way, you come out on top; it just depends on what you can handle.