As of Dec. 8, 2016, mortgage refinance rates slid lower per Bankrate’s survey. This means that rates for 30-, 15- and 10-year fixed rate mortgages are still within the record-low standard. And locking into fixed refinance rates offers two things: lower rates and more stable monthly payments in essence.
All things being held equal, let’s examine the benefits of refinancing into each type of fixed-rate mortgage.
Refinance Option 1: 30-Year Fixed Rate Mortgage
The Bankrate survey revealed that the 30-year FRM is at 3.99%, which is a point lower than a week ago. For example, a $100,000 refi loan at the current rate could cost you a monthly payment of $476.84 based on this mortgage loan calculator.
The 30-year fixed mortgage’s standard smaller payments coupled with today’s refi rates could go even lower. This affordability makes the 30-year FRM easy on the budget. Refinancing to a 30-year mortgage also serves as a safety net from inflation and possible rate hikes for many years to come.
- If you’re going to refinance into a 30-year mortgage, you are extending the life of your loan. If you shift from a shorter loan term, say 10 or 15 years, to 30 years, you could save on monthly payments as you’d be paying less. But, you’d be paying more on the interest, overall. The prolonged loan term spreads out the interest portion of the loan.
Refinance Option 2: 15-Year Fixed Rate Mortgage
Where 15-year fixed mortgage rates currently averaged at 3.17%, you will pay $698.79 per month on a $100,000 loan.
Generally, 15-year mortgages have lower interest rates than 30-year mortgages and could go lower if you refinance. It’s because they halve the period it takes to pay back a 30-year mortgage. This saves you on the interest portion of the loan. And depending on how stellar your credentials are, you could refinance into a 15-year with lesser fees.
Its shorter term, however, entails higher monthly payments as the loan needs to be repaid faster.
- You’ll pay more every month. This makes 15-year FRMs ideal for those whose finances have improved or got an increase since taking out the original loan to afford higher mortgage dues. It’s imperative to ready your finances for this jump in payment.
Refinance Option 3: 10-Year Fixed Rate Mortgage
Ten-year fixed rate mortgages, per Bankrate, averaged 3.09%. Borrowing the same $100,000 could entail a monthly payment of $969.77 at the current rate.
In terms of rates, a 10-year FRM is lowest among the other fixed-rate options presented. The rate difference between a 10-year and 30-year FRM is often 75% to 80% in favor of the 10-year FRM. This allows more savings on the interest than on a 15-year mortgage.
However, a 10-year FRM commands the highest monthly payment among the three because it needs to be repaid twice as short as the 15-year and thrice as the 30-year.
- You’ll pay even higher with 10-year FRMs. If your goal is to build equity faster (for cash-out purposes) and pay off your mortgage earlier and you can afford the increased monthly payments, a 10-year FRM is a good prospect.
When refinancing, the benefits should outweigh the costs. Consider your options and consult with experts.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.