It’s important to explore both 30-year and 15-year rates when considering a refinance. Because a 15-year loan is a shorter term, you can expect a higher monthly payment – but you’ll likely save on your overall loan cost with a competitive interest rate.
“If you want to pay less interest over the length of the loan, look for the lowest interest rate at the shortest term,” says Shelby McDaniels, national director of business development at Chase Home Lending. For many people, a 15-year mortgage refinance fits the bill.
Most lenders offer a lower rate for a 15-year refinance. However, even the slightest difference in percentage points can significantly affect the overall cost of your mortgage. “Shopping around for the right lender has the potential to save you money in the long run,” says McDaniels. She recommends comparing lender fees and interest rates to find a refinance option that best fits your goals.
The refinance process is the same for both a 15- and 30-year mortgage:
- Explore your options. “Work with a home lending advisor to determine both your short- and long-term goals and gauge which mortgage product meets your needs,” says McDaniels. Tools like a refinance calculator can help assess the costs associated with refinancing and how long they’ll take to recoup, what monthly payment you can afford, and what you’ll potentially save by refinancing.
- Submit an application. Once you’ve selected a lender, apply for the type of refinance you want. You’ll likely be asked to upload documents such as your identification, pay stubs, W-2 forms, bank statements and tax returns.
- Go through the underwriting process. Lenders will evaluate several factors to determine a borrower’s qualifications for a refinance, including credit score and debt-to-income ratio. You may be asked for additional documentation or information about recent employment or changes in income. You’ll also need to have your home appraised to determine the value and how much equity you have.
- Close and sign for the new loan. Just like when you purchased your home, you’ll be required to go through a closing process and pay closing costs. Costs will vary by lender, so that’s something to keep in mind when shopping for a loan – but most of the time you can roll those costs into the new loan.
Pros
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You can build equity and pay off your loan more quickly than you would with a 30-year refinance.
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You’ll pay less interest over time.
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The interest rate is typically lower than a 30-year refinance.
Cons
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You’re locked into a higher monthly payment than you’d have with a 30-year refinance.
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You’ll have less wiggle room in your budget should you face financial distress.
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The closing costs are significant.
Although a 30-year mortgage refinance is the most common, moving to a 15-year loan may be a good idea in some circumstances:
- Your credit score has dramatically improved. If you’re paying a high rate because your credit was mediocre when you bought your home – but it’s in a much better place now – a competitive rate on a 15-year refinance might keep your monthly payments close to what you currently pay.
- You want to move into a conventional mortgage from an FHA loan. FHA loans can be excellent for some first-time buyers, but they require long-term mortgage insurance premiums. A 15-year refinance might remove that extra cost without much increase to your monthly bill.
- You’re preparing for early retirement. A 15-year refinance may help you enter into retirement with no home debt.
Refinancing means paying off your existing home loan with a new loan. People typically refinance to get more favorable loan terms, such as a better interest rate or lower monthly payment, or to cash out some of their equity.
The main differences between a 15- and 30-year mortgage are the length of the loan term and the interest rate. Shorter terms typically offer lower rates, but your monthly payments will be higher. If you’re on the fence about which type of loan is better for you, here’s a tip: “You can effectively turn your 30-year into a 15-year mortgage by making bi-monthly payments,” says McDaniels, “but you won’t be locked into the terms of a shorter-term mortgage in case you hit a rough patch.”
A fixed rate mortgage applies the same interest rate for the life of the loan. With an adjustable rate mortgage, the rate will fluctuate after a set period of time. There’s usually a cap on how high the rate can go, but adjustable rate loans are seen as higher risk since you can’t count on your monthly payment to stay the same.
When it comes to refinancing your home mortgage, the most common option is a 30-year fixed rate loan – but a 15-year refinance may save you money in the long run. You can choose between a fixed- or adjustable-rate refinancing loan. Another option is a cash-out mortgage refinance, which lets you tap into your home’s equity and receive a lump sum payout.
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