The Benefits of Refinancing to a 15 Year Mortgage

If you're in a better financial situation now than you were when you agreed to that 30 year mortgage or adjustable rate home loan, now might be a great time to refinance and get extra money by potentially saving tens of thousands of dollars or more on interest. Refinancing to a 15 year home loan can benefit your future in terms of peace of mind, retirement savings and the amount of equity accrued.

If your wallet has grown a little fatter recently, you may be in a position to pay off your loan more quickly. Here are some reasons to consider refinancing to a shorter loan term.

Interest Rates Are Going Up

In the fall of 2018, home loan interest rates climbed. A survey of the Mortgage Bankers Association, Freddie Mac and Realtor.com predicts that 30 year fixed home loan rates will continue to increase, which implies that interest rates across the board will rise.

If you've thought about refinancing, it's wise to take advantage of the current low interest rates before they go up, up, up! Shorter-term loans like a 15 year home loan typically have a lower interest rate than their longer-term counterparts. Bankrate reports the benchmark 30 year rate in September 2018 was 0.57 percent higher than the rate for 15 year home loans.

If your credit score has gone up since you took out your home loan, you may qualify for lower rates. If you took out an adjustable rate home loan with initial low rates, those will likely be going up once the initial term ends, and that will leave you with a higher monthly payment. Depending on your original terms, interest rate and the amount of months left in your current loan, you could really set yourself up to save a lot of money by refinancing to a 15 year home loan.

Save More for Retirement

The interest you're paying each month may seem minor, but over the long term, it can mean a huge hit to your finances. For example:

Say you originally took out $250,000 as a 30 year mortgage at a fixed rate of five percent. Using a loan calculator, you can see that you'll pay $233,139.46 in interest. Compare that to the same loan amount on a 15 year loan with a fixed rate of four percent. You'd be paying only $82,859.57 in interest — more than a $150,000 difference in the long run!

Loan Type:

Loan Amount:

Interest Rate Percentage:

Total Interest Paid:

30 Year Fixed Rate

$250,000

5%

$233,139.46

15 Year Fixed Rate

$250,000

4%

$82,859.57

With the 15 year mortgage, you would save more than $150,000!

Depending on where you are at in your loan repayment, you could have the potential to save a lot of money in interest. With the money you save long-term, you can put more cash into paying down credit card debt, investing or contributing to a retirement fund.

Build Your Equity Faster

As you pay down your home loan principal, you gain home equity. Equity is important because it increases your overall wealth and lessens your debt. Stronger finances may benefit:

  • Your credit rating, since you owe less money on a home loan
  • Your buying power, since you can use a home equity line of credit to make big purchases (including ones that can make you money, such as an investment property)
  • Your ability to financially navigate an emergency or life change, like the need to pay long-term care expenses

Paying off more of your principal means a healthier financial state for you, whereas more money paid in interest offers no financial benefit.

Why Not Own Your Home Sooner?

Do you really consider yourself a homeowner? When your lender owns part of your home, you might not get that true sense of financial freedom you're after. Fully owning your home can increase your peace of mind now and enable you to put more money toward other things in life.

Freeing yourself from payments means more savings on interest. Plus, you get to achieve the ultimate homeowner goal of owning your property outright and no longer having a mortgage payment.

Lower Your Interest Payments and Increase Your Equity

Financial situations change, and if your situation means your bank account has grown, you might want to consider refinancing to a 15 year home loan. You can own your home more quickly and be closer to having one less bill to worry about, all while saving more for retirement or life goals.

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