Is it Time to Refinance Your 30-Year Mortgage to a 15-Year Mortgage?

Published April 1, 2022

A refinance to 15-year loan terms from a 30-year mortgage can open doors for your financial future. In this article, we’ll first take a look at the pros and cons of refinancing into a shorter loan term. Then, we’ll get into what a refinance to 15-year loan terms could mean for your financial future. Does this financial move make sense for you? Here’s how to know.

Refinance to 15-year loan: The basics

The most significant benefit to a shorter loan term is that you’ll pay off the loan faster. A 15-year loan could reduce your payment period significantly. However, the trade-off here impacts your monthly payments. You’ll swap the initial loan’s longer-term and smaller monthly payments for a shorter term with higher payments. In addition, most refinances require you to pay closing costs. Unless you choose a no-closing cost refinance, you’ll have to pay certain fees to refinance to a shorter loan term. 

For example, a $200,000 30-year loan with a 3% interest rate means you’ll pay about $843 per month. However, if you refinance that $200,000 loan to a 15-year term with a 2.25% interest rate, you’ll pay about $1,300 per month. 

Refinance to 15-year loan: Pros

Choosing to refinance to 15-year loan terms could put you on the fast track to owning your home outright. Plus, it will save you money on interest. However, these clear advantages aren’t the only benefits to a shorter loan term.

• Get a lower interest rate. You can expect a lower interest rate when you refinance to a 15-year loan. As a bonus, 15-year loans usually come at a fixed rate. A fixed-rate mortgage means that the interest rate remains the same despite fluctuating market rates. So when you refinance to a shorter loan term and start paying the lower interest rate for that loan, you can rely on that rate staying the same throughout the loan’s life. This makes it easier to plan for long-term financial decisions because you can more easily anticipate monthly payments. 

• Pay less interest. A 15-year loan has a significantly lower interest rate than a 30-year loan. A lower interest rate alone is enticing enough for some borrowers, but the real benefit of a 15-year loan term is that you’ll pay less interest overall. A shortened loan term means you’ll pay less interest by having a shorter payment timeline. A refinance to a 15-year loan means you’re shedding 15 years of interest payments, as well.

• Generate equity faster. The lower interest rate is the gift that keeps on giving. Since you’re paying less interest, more of your monthly mortgage payment goes toward your loan principal. In other words, a 15-year mortgage helps you build more equity each month than a 30-year mortgage. Paying down a higher portion of the principal balance each month not only helps you generate equity but also saves money. 

• Access equity faster. As you read above, a shorter loan term allows you to generate equity faster. You might be able to access that equity faster, too. Since you’ll have more equity in the home, you could refinance again with ease. You could use the money from that refinance for renovations or other financial support. High home equity can provide some financial protection (or, at minimum, stress relief) when the housing market takes a nosedive.

Refinance to 15-year loan: Cons

Shortening your loan’s term and refinancing to a 15-year mortgage could reduce the amount of money you’ll pay over time. On the other hand, those long-term savings will translate into higher short-term costs. If you aren’t cash-rich right now, then a 15-year mortgage refinance might not work. 

Let’s dive into some of the 15-year refinance’s cons:

• Pay higher costs at the outset. You need to have your future self in mind when deciding whether or not to pursue a mortgage refinance. Though you’ll save money in the long-term, refinancing to a 15-year loan will cost you more upfront. Closing costs typically account for 2-5% of your total loan amount and include, among other costs, an appraisal fee, title search, credit report fee, and mortgage insurance. A no closing cost refinance will lower your initial costs, but those fees will roll into monthly payments. 

• Anticipate higher monthly payments. The relief of a shortened loan term might be enough to influence your decision. However, that shorter loan comes with higher monthly payments, which could lessen the allure of a shorter loan term. You’ll need a solid financial foundation to accommodate these higher mortgage payments. The payment hike will come as no surprise, so you can take time before refinancing to decide if you can make it work.

• Potentially lose out on other financial opportunities. As discussed in this section, a 15-year loan refinance will increase your monthly mortgage payments. You might miss out on other financial opportunities when you reallocate funds to cover a refinance. You could use that money to save for retirement, assemble an emergency fund, invest, or save for an expense down the road. Weigh your options and see if another financial route might make more sense for your long-term goals.

Refinance to 15-year loan: should you consider this loan?

You’ve read about the basics of a refinance to a 15-year loan. You’ve weighed the pros and cons of taking out this loan. Now, it’s time to determine whether you’re in a financial position to consider this move. 

• You have 15 years or more left on your mortgage.

• Your current mortgage rate is higher than interest rates.

• You’ve increased your income since initially taking out the loan.

• You’ve increased your credit score since initially taking out the loan.

• You can afford a higher payment than when you first took out the loan.

Whether you still have questions or are ready to refinance to a 15-year loan, American Financing is here to help. Our mortgage experts are ready to assist you. Once you tell us about your financial goals, we can help you find the best loan to fit your needs. The American Financing experience focuses on you, your finances, and your goals. Let us help you make your dreams a reality.