Are you in a strong financial position and searching for a smart, efficient way to pay off your mortgage faster?
Refinancing allows you to replace your current mortgage with a new one that better suits your financial needs and goals.
What's in this article?
Homeowners with a 30-year mortgage can cut the mortgage term (or duration) in half with a 15-year mortgage loan, thereby gaining access to significant interest savings over the life of the loan.
However, borrowers must approach this decision wisely because changing from a 30-year to a 15-year mortgage almost always results in higher monthly mortgage payments.
In this article, we’ll explore the benefits and potential drawbacks of refinancing to a 15-year mortgage so you can make the most informed decision.
The benefits of a 15-year mortgage
A 15-year mortgage is structured to be repaid over 15 years.
However, the most popular loan term is 30 years because it is often the most affordable option for homeowners.
Let’s look at the key differences between 15-year and 30-year mortgages.
The differences between 15-year and 30-year mortgages
- Monthly payments: A 15-year mortgage has higher monthly payments than a 30-year mortgage because of the loan being repaid in half the time.
- Interest rates: 15-year mortgages typically offer lower interest rates than 30-year loans. For example, the current average 15-year fixed rate is a full percentage point lower (6.4%) than the 30-year fixed rate (7.5%).
- Total interest paid: A 15-year loan’s shorter repayment period results in less accrued interest than a 30-year loan.
- Equity: With a 15-year mortgage, a larger portion of each payment goes toward reducing the principal balance, helping the homeowner build equity more quickly than with a 30-year mortgage.
How much can I save in interest?
Refinancing to a 15-year mortgage can result in substantial long-term savings.
For example, a homeowner has a 30-year fixed rate of 7.5% on a $300,000 mortgage.
That homeowner decides to refinance to a 15-year fixed rate of 6.5%.
- Total interest paid for 30-year loan at 7.5%: $455,152
- Total interest paid for 15-year loan at 6.5%: $170,398
By refinancing, the homeowner would save approximately $284,754 in interest over the life of the loan!
Ready To Take Your Next Step?
Potential downsides of refinancing to a 15-year mortgage
Refinancing to a 15-year mortgage has numerous benefits, but it’s not right for every borrower.
Let’s look at the potential drawbacks of refinancing to a shorter mortgage term.
Higher monthly payments
Your loan term is shortened with a 15-year loan, yet you still owe the same principal amount.
In our previous example of the homeowner with the $300,000 mortgage, the monthly payment would adjust as follows:
- Current 30-year fixed-rate mortgage at 7.5%: $2,098 per month (principal and interest)
- New 15-year fixed-rate mortgage at 6.5%: $2,613 per month (principal and interest)
If the borrower refinanced, the resulting monthly payment would be an additional $515.
Reduced cash flow
Higher monthly payments can create less flexibility with your monthly cash flow.
When a larger portion of income is allocated toward the mortgage, the higher monthly payment can limit your ability to contribute to a savings fund, for example, or navigate unexpected expenses.
Impact on debt-to-income ratio
Lenders use the debt-to-income ratio (DTI) to determine borrowers’ ability to manage their monthly payments and other debts.
A 15-year mortgage may impact your ability to qualify for additional credit, such as car or personal loans because the increased monthly expense can increase your DTI.
Consider the long-term impacts of refinancing on your creditworthiness and whether you intend to apply for other forms of credit in the near future.
Borrower profiles: Who should refinance to a 15-year mortgage?
Who fits the profile for borrowers who could benefit the most from refinancing to a 15-year mortgage?
- Stable income and low DTI: Those with reliable, consistent income and low, manageable levels of debt apart from their mortgage, thus able to support higher monthly payments
- Strong emergency savings: Individuals who have an established emergency fund to handle unexpected expenses
- Nearing retirement: Homeowners in their late 40s to 50s who want to pay off their mortgage before or shortly after retiring
- Financially disciplined: Those who prioritize paying off debt quickly and can stick to a budget that includes higher payments
- Established retirement plans: Homeowners who are already contributing significantly to retirement accounts and won’t have to compromise these contributions to afford higher payments
- Equity builders: Those who want to maximize their home equity quickly for potential future use such as investment opportunities or major expenses
- Wealth builders: Individuals who view their home as part of a broader financial strategy to increase their net worth
- Comfortable with higher payments: Homeowners who can comfortably manage the increased monthly cost without affecting their overall financial stability
- Long-term residents: People who plan to stay in their home long enough for the benefits of refinancing to outweigh the initial costs
Does refinancing to a shorter mortgage term match your financial goals?
Contact the experienced loan officers at Compass Mortgage to discuss your unique borrower profile.
Factors to consider before refinancing
The decision to refinance to a shorter loan term often boils down to maintaining your current financial flexibility versus long-term savings.
Ask yourself the following questions to gauge whether refinancing is right for you:
- Do I have a stable and sufficient income to manage higher monthly payments comfortably?
- Would I still be able to make payments if there were a change in my employment status or a large unexpected expense?
- Am I aware of all the potential refinance costs, such as application fees, appraisal costs and loan origination fees?
- How long will it take for the savings from refinancing to cover the initial costs?
- Will this move give me greater financial flexibility and security in the future?
These questions can help you determine whether refinancing aligns with your current and future goals.
Alternative to shortening your loan term
If refinancing isn’t in the cards for you right now, you may be able to meet your goals in the middle.
Consider paying extra toward the principal on your 30-year loan, allowing you to maintain your current financial flexibility while reducing your long-term interest.
Lock in your new rate with Compass Mortgage
Refinancing to a 15-year mortgage is a major financial decision, but you don’t have to do it alone.
The Compass Mortgage team is ready to offer our guidance and expertise as you navigate the questions and concerns.
Discover your new rate today—and lock it in! Contact Compass Mortgage right away!