Is it a good idea to refinance to a 15-year mortgage?
Key takeaways
Moving into a longer-term loan: If you're already at least halfway through the loan term, it's unlikely you'll save money refinancing. You've already reached the point where more of your payment is going to loan principal than interest; refinancing now means you'll restart the clock and pay more toward interest again.
Today's national 15-year refinance rate trends
The national average 15-year fixed mortgage interest rate is 6.83%, up compared to last week's of 6.76%.
Key Takeaways
Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.
The 15-year mortgage has some advantages when compared to the 30-year, such as less overall interest paid, a lower interest rate, lower fees, and forced savings. There are, however, some disadvantages as well, such as higher monthly payments, less affordability, and less money going toward savings.
The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.
Negatively Impacting Your Long-Term Net Worth
Refinancing can lower your monthly payment, but it will often make the loan more expensive in the end if you're adding years to your mortgage. If you need to refinance to avoid losing your house, paying more, in the long run, might be worth it.
In general, it is a good idea to refinance to a 15-year loan if: You can get a lower rate than your current mortgage rate, ideally by at least a half to three quarters of a percentage point. You'll be in your home long-term. You can afford the higher monthly payment.
Refinancing the mortgage on your house means you're essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.
Product | Today | Change |
---|---|---|
15 Year Fixed Average | 6.06% | +0.12 |
Conforming | 6.22% | +0.11 |
FHA | 5.70% | +0.29 |
Jumbo | 3.30% | +0.05 |
What do you lose when you refinance?
You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
Not all homeowners are approved for refinancing, though. With home prices and interest rates still high, lenders are careful about who they approve. The rejection rate on mortgage refinance applications increased to 15.5% in 2023 from 9.9% in 2022, according to the Federal Reserve Bank of New York.
Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender.
Saving money on mortgage interest won't get you ahead in the long term if you're racking up interest on other debt. Similarly, if you do not have large cash reserves or an uneven income flow, the higher monthly payments of a 15-year mortgage might create a financial hardship.
Refinance into a shorter term
With a mortgage refinance, you can shorten your loan term by selecting a 20, 15, or even a 10-year loan. By selecting a shorter term, your monthly payment may increase. However, many homeowners are earning more today than when they first bought their homes.
Some people get a 30-year mortgage, thinking they'll pay it off in 15 years. If you did that, your 30-year mortgage would be cheaper because you'd save yourself 15 years of interest payments. But doing that is really no different than choosing a 15-year mortgage in the first place.
In most scenarios, a refinance will affect your monthly mortgage payment. But whether the amount goes up or down depends on your personal financial goals and the type of refinance you choose.
As a rule of thumb, experts often say that it's not usually worth it to refinance unless your interest rate drops by at least 0.5% to 1%. But that may not be true for everyone. Refinancing for a 0.25% lower rate could be worth it if: You are switching from an adjustable-rate mortgage to a fixed-rate mortgage.
For example, when refinancing your mortgage, there will be closing costs to be paid as part of the process. If you opt to have the closing costs rolled into the new mortgage, you're augmenting the mortgage balance — the amount you owe — and thus diluting your equity — the amount you own.
Experts are hopeful that mortgage rates will continue to decline this year as inflation cools and interest rates are cut. More homeowners should be able to take advantage of refinancing their mortgages in 2024, even if the housing market doesn't make a full rebound.
Is now a good time to refinance in 2024?
Currently, the MBA predicts the average 30-year mortgage rate will reach 6.1% by the end of 2024. Other industry projections range from 6% to 7%, so the potential for bigger savings is there.
"For those that closed a mortgage loan in the last two years, it will most likely make sense for them to refinance their rate at some point in 2024," says Christy Bunce, president of mortgage lender New American Funding. "We are already seeing an uptick in refinances."
For example, refinancing from a 30-year to a 15-year mortgage saves a lot in long-term interest payments. But keep in mind that a 15-year loan also requires a higher monthly payment. If you're not sure about committing to those higher payments, making extra principal payments could be an ideal compromise.
In many cases, there's no waiting period to refinance. Your current lender might ask you to wait six months between loans, but you're free to simply refinance with a different lender instead. However, you must wait six months after your most recent closing (usually 180 days) to refinance if you're taking cash out.
While mortgages can be refinanced immediately in certain cases, you typically must wait at least six months before seeking a cash-out refinance on your home, and refinancing some mortgages requires waiting as long as two years.
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