The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
Ready to Refinance to a 15-Year Mortgage? Here are the Benefits.
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 to a 15-year mortgage to potentially save tens of thousands of dollars on interest. Refinancing to a 15-year home loan can benefit your future in terms of peace of mind, retirement savings and faster-growing equity in your home.
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
While mortgage rates have fallen to near-record lows in recent years, the trend may not continue. According to a recent Bankrate survey, average home mortgage interest rates declined nearly a full point between April of 2020 and December 2021.1 However, interest rates spiked up in January 2022, with the average 30-year mortgage rate rising nearly half a percent in just a few weeks.
If you're thinking about refinancing, it may be wise to take advantage of the current interest rates that are still at historic lows before they go 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 January 2022 was 0.83 percent higher than the rate for 15-year home loans.1
Refinancing from a 30-year mortgage to a 15-year one isn’t the only way you could potentially lower your interest rate. If your credit score has gone up since you took out your home loan, for example, you may qualify for a lower rate even if you refinance with similar loan terms.
What if you have an adjustable-rate home loan that started out with a low rate? It might have seemed great at first, but as rates mortgage increase your rate could possibly adjust to a higher rate once the initial term ends. Once your rate goes up, you’ll have a higher monthly payment. But there’s good news! Depending on your original terms, interest rate and the number of months left in your current loan, you could really set yourself up to potentially 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. You would pay approximately $233,139 in interest.
Compare that to the same loan amount on a 15-year loan with a fixed rate of four percent. You'd only be paying around $82,859 in interest — more than a $150,000 savings!
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 ability to build wealth. The more equity you currently have in your home, the higher the potential profit would be if you sold your home. You may also be able to borrow against your equity to accomplish other goals, such as paying off credit card debt or renovating your home.
Having equity could also strengthen:
- 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.
Curious how much you could potentially save by refinancing your mortgage? Get an estimate using our handy mortgage calculator!
Tip: Want to get an idea if refinancing your home at a new loan rate could give you bigger savings? Check out our Mortgage Refinance Calculator.
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 the 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 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 if you’re ready to refinance to a 15-year mortgage. 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.