The Top Financial Benefits of Refinancing a Home Loan to a 15-Year Term
Published March 19, 2022
Refinancing a home loan to a 15-year term is a smart move for some homeowners. This type of refinance can help you pay off your loan faster, accumulate equity quickly, and reduce the amount of interest paid over the life of the loan. In exchange, homeowners take on a higher mortgage payment and incur the cost of a refinance. But, for those ready to change their loan terms, these financial rewards are well worth the cost of a mortgage refinance.
Below, we’ll discuss the biggest advantages homeowners see when they refinance to a 15-year loan term. First, however, we’ll cover some details specific to the refinancing process.
The basics of refinancing a home loan to 15 years
When homeowners refinance into a 15-year mortgage, they will see a few immediate changes. Their monthly payment will be the most noticeable. In most cases, mortgage payments increase when a homeowner refinances into a shorter loan term. Shrinking the repayment schedule to a shorter period means there are fewer months in which to make payments. As a result, the percentage of the premium paid per month increases, which pushes the mortgage payment higher.
Higher monthly payments mean that homeowners who refinance into a 15-year mortgage generally have less disposable income. You may also have more limited opportunities to invest in other ventures, like retirement or a child’s education.
Refinancing a home loan to a 15-year term means that you will have a higher monthly mortgage payment, but the long-term benefits are often worth the up-front cost. In addition, most homeowners should expect to refinance into a lower interest rate. This, in conjunction with the shorter loan term, lowers the interest paid throughout the loan. In some cases, homeowners save hundreds of thousands of dollars in interest.
A quick example
Let’s say that you have been paying your original mortgage for four years, but you want to take advantage of the lower interest rates and apply for a 15-year loan. Your current balance is $231,724, so you apply for a 15-year mortgage for this amount. You can qualify for a 2.20% interest rate – down from your initial rate of 4.15%.
In this example, your monthly payment increases by about $300, but by the time you have repaid the new loan in full, you would only have paid $40,544 in interest. With the original loan, your total interest payment would be $187,493. That’s a savings of $106,892.
The financial benefits of refinancing a home loan to a 15-year term
The above example illustrates some of the most important benefits of refinancing into a shorter loan term. Let’s recap.
Save on interest
When you refinance into a lower interest rate, you pay less interest over the life of the loan. When you’re refinancing a home loan to a 15-year term, you also reduce the length of time for interest to accumulate.
Quickly build your home equity
When you are paying a lower amount in interest over a shorter period of time, you will build up your home equity faster. Refinancing your home loan to a 15-year term means that more of your monthly payment will go toward the principal and less toward the interest. For example, the first payment on a 30-year mortgage loan may be $814.37. Only $359.37 would go toward the principal, but $455.00 would go toward interest. In contrast, with your new loan, you would make a payment of $1,304.59, and $939.59 would go toward the principal. The much lower sum of $365.00 would go toward the interest.
Pay off your mortgage faster
Refinancing a home loan to a 15-year term means that you pay your mortgage back in half the time of a traditional 30-year mortgage. In addition, this allows homeowners to contribute more of their income to other investments, like retirement savings or a child’s education.
Eliminate private mortgage insurance
If you pay for private mortgage insurance, you can eliminate it by refinancing your home loan to a 15-year term. If you have a conventional loan, you can stop paying private mortgage insurance if you have at least 20% equity in your home.
Make home improvements with your equity
If you opt for a 15-year cash-out refinance, you will have the money you need to begin home improvement projects. These renovations can quickly grow the value of a property. Plus, you will build equity faster because you are refinancing into a shorter loan term.
Monthly payments that are consistent
Refinancing a home loan to 15-year terms can be a strategic change for those who currently have an adjustable-rate mortgage. In this case, you will refinance into a fixed-rate mortgage and pay the same amount every month. Many people prefer the stability that a fixed-rate mortgage offers.
Make preparations to retire
Refinancing a home loan to a 15-year term can be an excellent option for people thinking ahead to retirement. You reduce the likelihood of contending with mortgage payments during retirement by paying off a mortgage faster. Additionally, building equity in a home can provide much-needed financial security.
Refinancing a home loan to a 15-year term will make it possible for you to own your home free and clear – all while saving money on interest. If you’re interested in learning how a refinance could benefit your financial future, give us a call or fill out our pre-approval form. Then, we can help you find the best mortgage for your home.