How Refinancing Your Mortgage From a 30-Year to a 15-Year Fixed Rate Could Save You Six Figures

by Sophia Bera on September 21, 2016

If you own a home or you’re currently looking to buy, odds are you’ve got (or are considering) a 30-year mortgage. It’s by far the most popular mortgage option. (And with interest rates at historically low levels right now, I highly recommend locking those rates in with a fixed-rate mortgage!)

Now, what’s popular isn’t what’s always right for your personal financial situation. Mortgages come with different time frame options that can affect things like your monthly payment and how much you spend on interest.

If you’re shopping around for a mortgage, study up on what a mortgage is and work with a mortgage broker to map out a few different payment scenarios. This might also be a great time to hire a financial planner to look at your overall financial picture and help you select the best mortgage for you.

Introducing the 15-Year Fixed Rate Mortgage

For many people, the less-popular 15-year fixed rate mortgage is a great choice. It offers a slightly lower interest rate and allows you to save tens of thousands of dollars in interest over the life of the loan because you pay it off faster.

There’s a catch, though: higher monthly payments. Often times a few hundred dollars higher than a 30-year mortgage.

For example, let’s say you want to take out a $200,000 mortgage. You can get a 15-year mortgage at 2.7% with a monthly payment of $1,352, or a 30-year mortgage at 3.5% with a monthly payment of $894.

That lower monthly payment on the 30-year is very attractive, but over the term of the mortgage, you’ll pay $78,259 more in interest for the privilege. (Here’s a calculator where you can compare how much 15- and 30-year mortgages will cost you.)

Which Is Best for Me?

Which mortgage you should choose depends on where you need your cash to go each month. If you have other debts (like student or car loans) or financial obligations, your best option right now might be a 30-year mortgage because the lower monthly payment gives you time to focus on paying off your other debt.

If you have no other debts and can work the higher monthly payment into your budget, I highly suggest considering a 15-year fixed rate mortgage. The shorter timeframe means you can save tens of thousands of dollars in interest over the life of the loan. If you’re planning on staying in your home for a long time, the savings in interest could be huge for you. On a half a million dollar home, this number is in the six-figures!

I Have a 30-Year Mortgage. Can I Switch to a 15-Year?

Yes! You can refinance to a 15-year mortgage. Keep in mind that when you refinance, you have to repay closing costs, which can run you a few thousand dollars, so shop around to find not just the best rate but also one where the closing costs are reasonable. Only refinance if you plan to stay in your home long enough so that the monetary savings from refinancing exceed the cost.

Why might you do this? Let’s say you pay $3,000 per month in daycare costs for your two kids. The monthly payment on a 15-year mortgage might be out of reach for you until your youngest child starts kindergarten. Once they do, you can refinance and apply that daycare tuition to the higher monthly mortgage payments and often lock in a lower interest rate at the same time!

It Pays to Do Your Research

Shop around for different mortgage options. You don’t have to default to a 30-year mortgage if other terms would be more favorable to you. Other expenses, like property taxes, homeowners insurance, and private mortgage insurance (PMI) if your down payment is lower than 20%, also affect how much you owe each month.

If you think you might be ready to buy your first home, check out my friend Lauren Bowling’s new book: The Millennial Homeowner: A Guide to Successfully Navigating Your First Home Purchase. It’s filled with great tips on the ins and outs of the homebuying process so you feel confident in your research.

Many millennials are feeling the pressure to buy a home, but take the time to run the numbers. Examine how different mortgages affect your monthly cash flow, and establish what’s most realistic for you right now (lower interest, or lower monthly costs). Remember, deciding to rent instead is also an option!

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