The Top Benefits of Refinancing to a 15-Year Mortgage
Published April 3, 2022
When many people purchase a home, they opt for a 30-year fixed-rate mortgage. A fixed-rate mortgage generally establishes the lowest monthly payments. This enables the buyer to optimize their purchasing power. Still, there are exciting benefits associated with refinancing to a 15-year mortgage. So why would you refinance with a 15-year mortgage?
Refinance out of an ARM
While a 30-year fixed-rate mortgage is a popular choice amongst home buyers, many prefer to use an adjustable-rate mortgage for their purchases. An ARM may have an initial period where the interest rate is fixed, but it will adjust after that initial term is up. Depending on market conditions, the new rate that the loan will adjust to may be substantially higher than the starting rate.
More than that, the rate may continue to change for the life of the loan. Commonly, homeowners with an ARM loan who have no intention of selling their home soon will choose to refinance to a fixed-rate mortgage. Compared to a 30-year fixed-rate mortgage, a 15-year fixed-rate mortgage usually has a lower interest rate.
Therefore, when you refinance with a 15-year mortgage, you can generally expect to lock in a lower rate than what your ARM interest rate may be. Even though the loan term may be shorter on a 15-year fixed-rate mortgage, it is possible to still lock in a lower mortgage payment and reduce interest charges over the life of the loan.
Pay off your loan faster
Your financial goals may change drastically over the years, so it may make sense to refinance with a 15-year mortgage. Paying off your mortgage in 30 years often is agreeable at the outset, but being tied to such a long mortgage term can hinder your ability to achieve other goals. For example, many people do not plan to retire until the mortgage is paid off.
By paying the mortgage off sooner, retirement zooms into sharper focus. With a long-term mortgage, you have the option to make larger payments and extra payments. Because of these options, you are not necessarily beholden to the 30-year timeline.
However, you will likely have a higher interest rate and pay more in interest charges. Furthermore, you are not on a set plan to pay the mortgage off by a specific earlier date. This can make it trickier to meet your financial goals.
When you refinance with a 15-year mortgage, on the other hand, you could have a lower interest rate and pay less in interest charges. More than that, your mortgage is established on a fixed plan to pay off the debt years earlier than you otherwise would. This takes the guesswork and uncertainty out of meeting major financial goals.
Invest in your home
Just as your financial goals can change over time, your financial situation may improve dramatically. Perhaps you recently landed a new job with a much higher salary. Maybe you paid off your student loans and have more wiggle room in your budget.
These are only a few situations where a homeowner may now be in a position to invest more heavily in their home. When you refinance with 15-year mortgage options, you can drastically reduce the interest charges that you may otherwise be responsible for over the life of the loan. This is because a more significant portion of each payment will be applied to principal rather than interest by adjusting the loan term length.
This means that home equity can accrue more substantially over time. Essentially, you are positioning yourself to reduce mortgage costs and increase equity at the same time when you refinance with a 15-year mortgage.
Improve your home
Even when you do your best to keep up with home maintenance tasks, there will come a time when major home repairs are needed. Additionally, some home décor will become dated and unattractive. Whether the house needs a new roof, a new HVAC system, or a significant renovation, coming up with the funds necessary to invest in your home’s condition can be challenging.
However, through a refinance with 15-year mortgage options, you can tap into your home equity to get the funds you need. Home equity accrues through value appreciation over time. It also accrues as you pay down your loan’s principal balance over time.
The only ways to cash in on that equity are to sell the home or opt for a mortgage refinance. By choosing to refinance with 15-year mortgages, you can access this equity while enjoying a lower interest rate and adjusting your loan payoff date.
Lower your interest rate
The difference between a 30-year interest rate and a 15-year interest rate can seem relatively small at first glance. In fact, the difference may be well below a percentage point. So why would you go through the process of refinancing your mortgage to reduce the interest rate by a seemingly marginal amount?
In reality, given the length of a mortgage and the size of the loan amount, this slight difference in the interest rate can equate to tens of thousands of dollars or more in additional interest charges over the years. When you refinance with 15-year mortgage terms, you can potentially secure a lower interest rate than what you have today. This lower interest rate enables you to make larger principal payments and lower interest payments each month.
Even though the monthly payment with a 15-year mortgage may be higher in some instances, the reduced interest charges and faster debt reduction can make a 15-year mortgage more attractive overall. Specifically, the long-term cost of a 15-year mortgage is far more affordable than the long-term cost of a 30-year mortgage.
Learn more today
Are you trying to decide if refinancing with a 15-year mortgage is financially advantageous? Each homeowner has unique circumstances to consider when deciding whether to refinance with a 15-year mortgage. Interest rates change regularly, and your outstanding loan balance declines with each payment.
With so many moving factors, it is crucial to understand your specific mortgage loan options. Now is the perfect time to get prequalified for a 15-year mortgage so that you have all the facts in front of you.