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Key takeaways
- Refinancing from a 30-year mortgage to a 15-year mortgage can help you save a significant amount of money in interest and pay off your mortgage sooner.
- While a 15-year mortgage comes with a higher monthly payment, it also leads to building equity and being free of mortgage debt faster.
- Shopping around and comparing rates from different lenders is crucial to finding the best offer when refinancing your mortgage.
When they consider refinancing, homeowners often opt to switch to a 15-year mortgage from a 30-year mortgage, especially if they can get a lower rate. The 15-year mortgage can set people on the path to build equity faster, pay off their mortgage sooner and pay less in interest over the loan term. But, it often comes with a downside — a larger monthly payment. Let’s break down whether refinancing to a 15-year mortgage is right for you.
Should you refinance into a 15-year mortgage?
There are questions you need to consider before refinancing to a 15-year mortgage. Among them:
- Have you had your current mortgage long enough to refinance? Many lenders require a period between getting your current mortgage and a new one.
- Can you afford the higher monthly payment? If you’re refinancing to a 15-year from a 30-year, your payment is likely to go up because you’re paying back your loan in half as long.
- Will you remain in your home long enough to break even? Refinancing comes with closing costs. Even if you’re refinancing to a lower rate, it could take up to a few years to recoup the cost of those upfront expenses.
- Will a higher monthly payment get in the way of other financial goals? You need to be sure you have enough cash flow to still maintain an emergency fund, save for retirement and meet other financial goals.
- How secure is your job? Having a shorter-term mortgage means more expensive monthly payments and a tighter repayment timeline. Could these features be a problem if you lose your income?
- Is it smarter and easier to simply pay more on your current mortgage? If getting free and clear is your main aim, you can do that just with bigger or extra payments towards your principal. Plus, you skip the whole loan-application routine, and potential problems if your finances or credit score have suffered dings of late.
Learn more: Current 15-year refinance rates
Pros and cons of refinancing to a 15-year mortgage
Refinancing is a big step, so before committing, weigh the potential benefits and drawbacks.
Pros of refinancing to a 15-year mortgage
- Lower interest rate: Interest rates for 15-year fixed loans are often lower than those on 30-year mortgages. That lower rate, plus a shorter repayment period, can save you tens of thousands (or more) in interest.
- Build equity faster: Paying off your mortgage at a faster pace allows you to build equity more quickly. You can tap that equity in the future via a home equity loan, home equity line of credit (HELOC) or cash-out refinance.
- Reduce monthly payments: If your new rate is significantly lower than the existing rate, you could have a lower monthly payment.
Cons of refinancing to a 15-year mortgage
- Closing costs: If you can’t afford the closing costs of a 15-year refi upfront, you won’t save as much as you hope to.
- Less liquidity: Homes are an illiquid asset, meaning that you can’t easily turn them into cash. Tying all your money up in your home can be risky, especially if you don’t have an adequate emergency fund.
- A higher monthly payment: If you refi to a rate that’s not significantly lower than your current one, your payment will increase. You’ll need to be able to afford that increase on top of other obligations month to month.
- Less money for other things: If more of your monthly budget is going to your mortgage, you might have less to contribute to a retirement plan, other investments and emergency savings, or paying down debt. Along with that, it can make it harder to qualify for other forms of credit like a car loan, since your debt-to-income (DTI) ratio would be higher.
- Refinancing takes time and lowers your credit score: The process to refinance involves lots of paperwork and waiting, which can be inconvenient. In addition, applying for a refinance is the same as applying for new credit or a mortgage, which temporarily lowers your credit score.
How much you can save refinancing to a 15-year mortgage
Let’s examine how a lower interest rate and shorter loan term affect the principal amount of a mortgage. Here are three scenarios with a 30-year, $200,000 mortgage. They include: keeping the status quo, keeping the current mortgage but prepaying it, and switching to a 15-year mortgage.
| Scenario | Interest rate* | Monthly payment (principal and interest) | Total interest paid |
|---|---|---|---|
| *Bankrate refinance averages as of April 10, 2024 | |||
| 30-year loan for $200,000, paid off in 30 years | 7.02% | $1,333 | $279,988 |
| 30-year loan for $200,000, paid off in 15 years | 7.02% | $1,803 | $123,514 |
| 15-year loan for $200,000, paid off in 15 years | 6.55% | $1,748 | $114,589 |
As you can see, if your goal is to pay down your mortgage faster, you can also do it by making periodic extra payments on your existing mortgage loan (adding $470 to each monthly payment in this case). With extra payments over your loan term, you can shave time off your loan — even 15 years if you prepay aggressively.
The catch with this strategy is that you might pay a higher interest rate on your current 30-year mortgage compared with a new 15-year loan. You’ll also have the hassle of managing, specifying and sending in extra payments that will need to be applied to your loan principal.
But if you want to preserve your tax deductions for whatever reason, you’ll have more to deduct in mortgage interest when you file your return each year if you keep the old mortgage. And you’ll pay considerably less interest overall — not as much as you would with a 15-year loan, admittedly, but still a big savings than if you kept the status quo.
When is it a good idea to refinance to a 15-year mortgage?
In general, it is a good idea to refinance to a 15-year loan if:
- You can get a lower rate than your current mortgage rate, ideally by at least a half to three quarters of a percentage point.
- You’ll be in your home long-term.
- You can afford the higher monthly payment.
- Your credit score or income has increased since you were first approved for your loan.
- You have 15 (or more) years remaining on your mortgage.
Next steps on refinancing into a 15-year mortgage
Before refinancing to a 15-year mortgage, carefully consider the impact on your finances. Evaluate your ability to pay monthly expenses and how the higher payment will affect your capacity to pay down debts, invest or manage daily expenses, versus staying put with the remaining term on your existing 30-year mortgage.
Going to go for it? If you’re ready to refinance to a 15-year mortgage, follow these steps:
- Step 1: Strengthen your credit. Make concerted efforts to boost your credit score by paying down debts and checking your credit report for errors. The better your credit score, the more likely you’ll get a better mortgage offer.
- Step 2: Know your budget. Estimate how much your mortgage payment will change and be prepared to have the cash to cover it.
- Step 3: Gather financial information: Pull together documents on your income, assets and debts, such as bank statements, W-2s and credit card bills.
- Step 4: Shop around. Carefully compare current mortgage refinance rates from different lenders.
- Step 5: Close the mortgage. Go through underwriting, submit to an appraisal and close on your refinance with the lender you choose.
