Should you refinance a 30-year mortgage to 15 years?
Being a homeowner is just about one of the most significant accomplishments a person can achieve in their lifetime. The allure of owning a home all to oneself can be so appealing that you can hardly blame people for wanting to do all they can to speed the process along. For homeowners locked into a 30-year fixed home loan, this usually translates to trying to refi down to a 15-year loan so they can claim full ownership sooner rather than later.
There are other advantages to refinancing a 30-year mortgage to a 15-year loan that add to the draw: The shorter loan agreement typically comes with a lower interest rate, which means you’ll be saving on your monthly payments in the long term. The flipside to that is that lower interest payments could result higher monthly payments compared to the 30-year loan, so there is a trade-off to consider.
With that said, here’s a quick rundown of points to think about if you are considering refinancing to a 15-year loan.
- Can you afford the payments? Say you’ve got a 30-year mortgage on a $200,000 loan with an interest rate of 3.8%. At this rate, you’ll be paying about $138,000 in interest during the loan’s lifetime. This same loan at a 15-year fixed rate would see the rate payments drop to around 3.1% (total interest payments: ~$50,000), but the monthly mortgage payment itself increases by about $400 a month. So you’ll be saving more in the long haul, but can you afford the monthly increase now?
- Make sure the rest of your finances are in order. Before deciding to undertake something as significant as a home loan modification, you’ll want to take a good look at your other financial responsibilities and make sure adding another burden to the pile won’t cripple you. If you’ve got large car or credit card debts that need to be paid down, we’d recommend focusing on those first before you take on any more major financial responsibilities.
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