Should You Refinance to a 15-Year Mortgage?

What Are the Pros of a 15-Year Mortgage?

Pay less interest over the life of your loan
Gain equity faster

What Are the Cons of a 15-Year Mortgage?

Significantly larger monthly payments
Can negatively affect your financial future

With interest rates dropping, we have been fielding more questions about refinancing. What rate could I qualify for? Should I refinance? Would it make sense to refinance to a 15-year mortgage? While all of these are important questions to ask, we thought we’d dedicate this blog to discussing the pros and cons of refinancing from a 30-year loan to a 15-year one.

While each person’s financial situation is unique, we’ve found that refinancing to a 15-year loan often makes sense for people with stable finances who are planning to live in their home beyond the life of their loan. Conversely, 15-year loans often aren’t an ideal choice for those who don’t have a lot of disposable income.

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Pros

One of the biggest benefits of a 15-year mortgage is that you will pay much less in interest over the life of your loan. This is mostly due to the fact that you’ll be paying interest for half as many years. For example, for a $250,000 loan at 3.5%, you could expect to pay approximately the following amounts in interest over the life of the loan.

15-Year: $72,000
30-Year: $154,000

The other big benefit is that with a 15-year loan, you gain equity in your home much quicker. In fact, you get to own your home outright much quicker. And trust us, getting to a time when you won’t have mortgage payments as soon as possible is a big selling point.

Cons

After reading the pros of 15-year loans, it’s hard to imagine why anyone would choose anything else. But, the biggest hurdle to getting a shorter-term loan is the monthly payments. Remember that example we used of a $250,000 loan at 3.5%? Below is approximately what you’d be paying for principal and interest each month (taxes and insurance would still need to be added onto the amounts listed).

15-Year: $1,800
30-Year: $1,100

When we advise our clients on their loan options, we like to focus on your financial future as a whole. While you may be able to afford the higher monthly payment, it’s important to ask yourself a few important questions before deciding. Will this stress my finances? Will this prevent me from making investments for the future? Would I be able to afford this payment if my financial situation were to change? Will this hinder my ability to contribute to investment or retirement accounts?

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