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Is Refinance Mortgage to a 15 Year Better Than Making Extra Payments

refinance mortgage

Now is a great time to refinance your home. But do you know whether you should refinance from a 30-year mortgage to a 15-year one?

Most homeowners who want to refinance mortgage rates are hoping to get a better rate and lower their monthly payments. However, you always have the choice of refinancing to a 15-year mortgage rather than finishing out 30 years of payments.

Is it better to refinance to a 15-year mortgage than make extra payments? Keep reading to discover the answer!

When to Refinance Mortgage

Our guide is going to help you learn about both the benefits and drawbacks of refinancing your mortgage. But first, we need to focus on the most basic question: when to refinance mortgage rates.

One way of answering this question is to research the new interest rate you’ll be able to get on your mortgage. If you can lower the interest by one or more percentage points, then you’ll see some serious savings regardless of whether you get a 15-year or 30-year mortgage.

Another way of answering this question is to take an honest look at your finances. If you switch to a 15-year mortgage, your payments will almost certainly go up (more on this soon). If you are unable to make these higher payment amounts, then you most certainly should not switch to a 15-year mortgage.

Advantages of a 15-Year Mortgage

In order to decide whether to refinance into a shorter mortgage, it’s important to understand all the factors. With that in mind, let’s examine some of the advantages of a 15-year mortgage.

First of all, you should be able to get a lower interest rate when you refinance to a shorter mortgage. While your payments are likely to be higher, the potential for lower mortgage rates may be a powerful incentive.

Second of all, the shorter mortgage will help you develop equity faster. In time, this can help you take out home equity loans, lines of credit, and even cash advances should you need it.

Finally, there is always a chance that your monthly payments will be similar to what you already pay. Honestly, it’s impossible to tell until you speak with an experienced lender.

Drawbacks of a 15-Year Mortgage

The advantages of refinancing into a 15-year mortgage make it sound very tempting. Before you pull the trigger, though, it’s important to know about some of the potential drawbacks of doing so.

The first issue is one that we already touched on: In most cases, a shorter mortgage translates to higher monthly payments. Some homeowners refinance only to discover that the higher monthly payments are negatively affecting their quality of life and ability to put away sufficient savings.

That brings us to the second issue. In short, every extra dollar you put towards your mortgage is a dollar that put towards a savings account or a retirement plan.

Depending on your financial situation, that may not be much of a drawback. Some homeowners find it much easier to fund their eventual retirement once they cut the length of their mortgage payments in half.

The Impact on Your Interest

As you may have guessed, this is the single largest factor in whether you should refinance to a shorter mortgage. That’s because the interest rate will determine how much you need to pay each month under the new mortgage plan.

For example, let’s say that you have a current 30-year mortgage on a $200,000 house. If the mortgage has 4% interest, then you can expect to pay approximately $955 each month.

If you had the same interest rate and refinanced to a 15-year mortgage, then those payments would jump to around $1,479 each month. That’s a pretty big difference, but not as big as the difference in your overall interest payments.

Under a 30-year mortgage at 4% interest, you can expect to pay $143,739 in interest over the lifetime of the loan. But under the 15-year plan, you’ll only pay $66,288 over the lifetime of the loan.

In other words, refinancing to a shorter mortgage is likely to increase your monthly payments (though you can likely negotiate to a lower interest rate). But over the lifetime of the mortgage, the shorter term will put a lot of money back into your pocket!

Not the Only Way to Pay Early

If you ask someone why they want to refinance to a shorter mortgage, the answer is usually straightforward. For most homeowners, the basic goal is to pay their home loan off that much quicker.

However, one thing you should consider is that nothing keeps you from already paying your home off sooner. After all, your monthly payment is effectively a minimum payment. As with other loans or lines of credit, you can always choose to pay higher than the minimum whenever you want.

In some ways, doing this is getting the best of both worlds. For example, if you have enough disposable income, you can simply pay extra until the loan is paid off. But if your financial situation should change, you still have the safety net of the original minimum payment.

Why, then, do so many people prefer to formally refinance? For some homeowners, it is difficult to save money or use the extra cash to pay debts down. Refinancing the mortgage, then, ensures that enough money goes towards the home loan to pay it off early.

And, of course, speaking with a lender gives you the chance to lower your interest rate and learn exactly what the new payment will be. This is typically far better than making a guess and paying extra each month.

Your Next Move

Now you know when to refinance mortgage rates and what the advantages of doing so are. But do you know which lender can help you get the best possible 15-year mortgage?

Our team specializes in helping those in the Portland area buy the homes they want at the rates they deserve. To see how we can make your own refinancing dreams come true, simply contact us today!

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