When Should You Refinance to a 15-Year Fixed-Rate Mortgage?
Published April 7, 2022
Homeowners who originally borrowed an adjustable-rate mortgage might be ready to refinance to a 15-year-year fixed-rate mortgage. Upon first purchasing a home, there is often a wide range of mortgage options available to choose from. For many new homeowners, the potential benefits of an adjustable-rate mortgage can be hard to pass up.
However, adjustable-rate mortgages can be risky, and they can pose longer-term challenges depending on how interest rates change. If you're wary of dealing with an adjustable-rate mortgage, you may want to refinance to a 15-year fixed-rate mortgage. This guide will provide all the details you need to determine if you should refinance to a 15-year fixed-rate mortgage.
Why are adjustable-rate mortgages difficult for some homeowners?
While adjustable-rate mortgages are appealing to many first-time buyers, they are also risky. Their interest rates will adjust based on market movements. A notable benefit of adjustable-rate mortgages is that they usually come with lower initial interest rates than fixed-rate mortgages. It's possible that your initial rate will remain fixed for up to five years after the loan is approved. However, once that initial period is over, the interest rate becomes adjustable.
You never know what will occur over the course of an adjustable-rate mortgage. If rates happen to drop over time, you will benefit from these changes via accessing lower interest rates and a reduced monthly payment. It's common, however, for interest rates to increase. If the increase is high, your monthly mortgage payments could also rise considerably.
You may be in a situation where you're dealing with ballooning payments, unpredictable interest changes, and overpaying. Even if your interest rates drop for a short period of time, they could rise again by the next month or quarter.
Unless your income levels far exceed the amount in payments made every month, handling interest changes can be complicated. The unpredictable nature of these changes mean that your monthly mortgage payment won't be consistent. If you find yourself in this situation, you should refinance to a 15-year fixed-rate mortgage. This can provide access to more consistent payments and interest rates over the course of the loan.
Why might a fixed-rate refinance be a good idea?
Fixed-rate mortgages often come in 15- and 30-year terms, but American Financing provides options for personalized loan terms. For example, if you decide to refinance to a 15-year fixed-rate mortgage, you'll pay off the entirety of the loan in just 15 years. This option should be feasible if you've already paid off a considerable amount of your initial loan.
The main benefit of opting for a 15-year fixed-rate mortgage is that you'll pay less in interest when compared to a 30-year fixed-rate mortgage. In fact, your interest payments should be at least 50% lower over the lifetime of the loan. The interest rate you receive should also be lower than the rate you're paying with your current mortgage.
When a lender approves a 15-year fixed-rate mortgage, they take on less risk than they would when approving a lengthy 30-year mortgage. This is why interest rates are usually a quarter point to a full point lower.
If you've had your current adjustable-rate mortgage for around ten years, choosing to refinance to a 15-year fixed-rate mortgage will allow you to pay off your loan sooner than you had anticipated. Predicting your mortgage payments every month should also make it easier for you to budget ahead.
Conditions you should meet to refinance to a 15-year fixed-rate mortgage
Now that you've decided to refinance to a 15-year fixed-rate mortgage, it's time to determine what conditions you must meet to refinance your mortgage. The conditions you need to meet can be separated into financial and personal requirements, the former of which are easier to identify.
If your current mortgage is a conventional ARM, you need a credit score of at least 620 to be approved for a refinance. A higher credit score makes your application more likely to be approved. Credit scores of 700 or higher should also net you a lower interest rate.
Owning equity is another requirement for anyone who wants to refinance to a 15-year fixed-rate mortgage. If you've built up 20% or more in equity, being approved for a 15-year fixed-rate mortgage is much easier. This option also allows you to avoid paying for private mortgage insurance when you refinance. However, if your equity is lower than 20% of the home value, you may need a higher credit score to qualify for this loan.
There is also a range of personal requirements that you'll likely want to meet before choosing to refinance to a 15-year fixed-rate mortgage. For instance, you should have a stable job. When a loan changes to a 15-year fixed-rate mortgage, your monthly payments will be higher than they would be with a 30-year fixed-rate mortgage. Having a stable job should give you more confidence that you can make your mortgage payments every month.
It's also common for homeowners to switch to a 15-year fixed-rate mortgage when nearing retirement. Since you're still generating income, having your loan approved will be easier than it would be if you were retired. Additionally, you should only look into refinancing to a 15-year fixed-rate mortgage if you intend on living in your current home for at least several more years or if you want to own the home outright for other reasons.
Red flags that might indicate you aren't ready for a 15-year fixed-rate refinance
Though dealing with an adjustable-rate mortgage can be frustrating, some red flags may indicate you may not be ready to refinance to a 15-year fixed-rate mortgage. If interest rates are still relatively high, you may not benefit much from changing to a fixed-rate mortgage. Many homeowners wait until the interest rate is at least a half point lower before refinancing.
You might also want to avoid refinancing if your current employment is unstable or you have a high debt-to-income ratio. While a 15-year fixed-rate refinance can be helpful for your monthly payments, this option shouldn't be explored if your financial security is tenuous.
Alternatives to a 15-year fixed-rate refinance that alleviate ARM burdens
If you don't bring in enough income each month to meet the qualifications for a 15-year refinance, there are alternatives to consider. The best options at your disposal are 20-year or 25-year fixed-rate mortgages. Your monthly payments should decrease significantly by selecting one of these refinancing options.
Once interest rates begin to climb, adjustable-rate mortgages can quickly become a hassle. If you want to avoid the frustration that comes with these mortgages, consider switching to a 15-year fixed-rate mortgage by refinancing your current loan. If your credit score is high enough and your financial situation is strong, qualifying for a 15-year fixed-rate refinance should be simple. Not sure which would be best for your personal situation? Get in touch or use our online mortgage calculators. We're always happy to talk through your options.