Refinancing from a 30-year, fixed-rate mortgage into a 15-year fixed-rate note can help you pay down your mortgage faster and save lots of money on interest, especially if rates have fallen since you bought your home. Shorter mortgages also tend to have lower interest rates, resulting in even more savings.
So, if you can afford it, switching to a 15-year mortgage can be a good thing. The ideal candidates are homeowners who have been in their homes for several years and have monthly budgets and incomes that can comfortably accommodate the higher mortgage payments.
If this describes you, and you’re considering switching, you’ll want to compare current refinance rates to make sure you can get a good interest rate for your particular situation. Your Caliber loan consultant is happy to advise you on this.
A 15-year mortgage is not for everyone though. Your monthly house payment will increase substantially because you’re compressing the repayment schedule into a shorter time frame, which means that means you’ll have less cushion in your monthly budget. If this sounds daunting, this may not be the right choice for your situation.
A 30-year mortgage with lower monthly payments allows for more budget flexibility. That can be critically important if your income changes, if you lose a job, or if you have financial emergencies to that arise. It’s important to carefully consider the impact higher mortgage payments will have on your ability to pay current and unforeseen monthly expenses. Having too much of your monthly income tied up in your home can be risky.
Even if you do have enough income to easily make a larger mortgage payment, there are other considerations.
A shorter mortgage term will affect your capacity to pay down other debts. Look at your other liabilities to see if they have a higher interest rate, such as credit cards and auto loans. If so, your money would be better used paying down these higher interest items first.
Let’s say a 15-year mortgage would increase your monthly payments by $400. Could that money be invested elsewhere for a higher return? If you have investment opportunities with a better rate of return than the savings on a 15-year mortgage, then going with the shorter term on your mortgage doesn’t make good financial sense.
If you can make more money elsewhere, you don’t want to give up your most valuable capital, which is the cash on hand that you have each month for these investments. In other words, don’t restrict or lose your access to your own money.
If your goal is to pay down your mortgage faster, you can do that with a 30-year loan by simply making extra payments whenever you’re able. If you make enough extra payments over your loan term, you can easily shave off time from your loan, even as much as 15 years.
The catch with this strategy is that you’ll still pay a somewhat higher interest rate on the 30-year mortgage compared to a 15-year note.
If you do make extra payments, make sure you indicate that these payments are to go toward your loan principal. Your Caliber Loan Consultant can show you how to do that.
Here’s an example of how a lower interest rate and shorter loan term impact the principal amount of a mortgage.
In the example below, a homeowner with a 30-year $200,000 mortgage can pay it off in 15 years by adding $524 to each monthly payment. With a 30-year mortgage, you can skip the extra $524 payment any month if you have other additional expenses. A 15-year mortgage with a higher minimum payment, however, doesn’t give you that flexibility – you’ll be required to make the higher payment or risk default.
|Interest Rate||Monthly P & I *||Total Interest Paid|
Loan paid in 15 years
*Monthly Principle and Interest.
You can also contact a Caliber Loan Consultant who can help you with a mortgage amortization and show the effect of extra payments.
How’s your retirement fund? Check on this and see if you’re currently contributing enough. Instead of refinancing to a 15-year mortgage, you may be better off putting more money toward a 401(k) plan or an IRA account.
You also want to make sure you’re maximizing your tax benefits in these and other types of programs, like health savings accounts (HSAs) and 529 college savings accounts. Compared to these plans, paying down a low-rate, potentially tax-deductible debt like a mortgage is a low financial priority.
As you can see, switching to a 15-year mortgage requires a thorough analysis to see if it works as part of your overall investment plan. Having more money in your home equity is an excellent long-term investment, but it’s not a liquid asset, which can limit your financial flexibility.