We recommend that you refinance a 30 year mortgage with a 15 year mortgage, especially if you can keep your monthly payment at close to the same level. The reason refinancing makes sense is because you reduce the length of your mortgage, which means you pay off your loan balance faster and cut your total interest expense.
The best way to think about it is that it will take you 30 years to pay off your current mortgage if you make your regularly scheduled payments. If you are five years into your current loan and refinance into a new 15 year mortgage, it takes only 20 years to pay off your original loan (5 years of paying your current mortgage + 15 years paying your new loan = 20 years to pay off mortgage).
The logic is the same regardless of if you are 5 or 10 years into your current mortgage. As long as the length of your new mortgage (15 years) plus the number of years you are into your current loan is less than 30, then you can save money by shortening your mortgage when you refinance. The more years you can eliminate from your mortgage, the more you save.
In this example, taking a 30 year mortgage and effectively making it a 20 year loan saves you ten years of mortgage payments and potentially tens of thousands of dollars in interest expense. Refinancing makes even more sense if you can maintain and not increase your monthly mortgage payment significantly.
Use ourMORTGAGE REFINANCE CALCULATORto determine your new monthly payment and how much you can save by refinancing
Please note that the interest rate on a shorter term mortgage such as a 15 year loan is lower than a 30 year mortgage but your monthly payment may be higher because you pay back the loan over a shorter period of time. The best way to keep your monthly payment low when you refinance is to reduce your mortgage rate as much as possible and not increase your loan balance.
For example, if you originally took out a $150,000 mortgage but your current loan balance is $125,000, your new mortgage when you refinance should also be $125,000, if possible. The lower your mortgage rate and loan balance, the lower your monthly payment.
The table below shows refinance rates and fees for leading lenders near you. We recommend that you contact multiple lenders to find the best mortgage refinance terms. Shopping lenders is also the best way to save money on your refinance.
One common question is should you refinance if you are going to sell your home relatively soon? If you can shorten your mortgage, refinancing still makes financial sense even if you plan on selling your home and paying off your new loan within a couple of years. This is because a 15 year mortgage enables you to pay down your loan balance faster than a 30 year loan, which means you build equity in your home faster.
For example, if you plan to sell your home in two years, paying a new 15 year mortgage for two years reduces your loan balance more than paying your existing 30 year loan for two years. The faster your pay down your mortgage, the more equity you have in your home and the more proceeds you receive when you sell it.
If you do intend to sell your home within a relatively short period of time, we recommend that you keep your closing costs relatively low when you refinance so it takes you less time to recover your costs. There is usually a trade off between your mortgage rate and closing costs, with the lower your costs, the higher your rate, so you need to find the right balance.
Whatever loan terms you choose, refinancing a 30 year mortgage into a 15 year loan should save you a significant amount of money in the long run.
"Adjusting the length of your mortgage." A Consumer's Guide to Mortgage Refinancings. The Federal Reserve Board, August 27 2008. Web.« Return to Q&A Home About the author