If there is one sure-fire way to reduce the total interest paid on a mortgage, that route is to shorten your mortgage term from a 30-year mortgage down to a 15-year mortgage. But shortening your mortgage term is only one reason to refinance your mortgage from a 30-year to a 15-year mortgage. Every family has their own financial goals and in the article that follows we will talk about how to recognize when to refinance to 15 year mortgage.
Reasons Why a 15 Year Mortgage is a Great Option
There are several reasons why refinancing one’s mortgage from a 30-year mortgage to a 15-year mortgage is a great option. Interest rates are lower on a 15-year mortgage than they are on a 30-year mortgage so that makes the switch an attractive option. Second, by shortening the mortgage term the total interest savings over the life of your loan can be significant. And the biggest reason of all to refinance to a 15-year mortgage is the opportunity to pay off your home and own it free and clear much sooner with a shorter term loan.
“When refinance activity is high as we’ve seen in the past several years almost half of the activity that is refinanced is going from a 30-year to a 15-year mortgage” says Stephen Khan, a Phoenix, Arizona based mortgage loan officer. In most cases a 15-year mortgage will be at least one percentage point lower than a 30-year mortgage so the opportunity to lower one’s rate and pay off the mortgage faster is very attractive for many homeowners.
For an example of what refinancing from a 30-year mortgage to a 15-year mortgage can do for a homeowner let’s look at an example of someone who has lived in their home and paid on their mortgage for a period of five years. This homeowner has a $200,000 30 year mortgage at 4.875% percent with a monthly payment of $1,058. By refinancing to a 15-year mortgage after five years paying on the 30 year mortgage, the borrower would end up paying about $1,288 per month at an interest rate of 3.25%, but would end up saving around $65,000 in interest costs.
Financial Considerations When Refinancing to a 15 Year Mortgage?
Refinancing from a 30-year mortgage to a 15-year mortgage will normally result in a higher monthly payment for the borrower even with the lower interest rate, because the borrower is shortening the term of the loan. But the benefit of shortening the term of your loan to a 15-year mortgage is you are building equity at twice the rate than you would if you stayed with your 30-year mortgage.
When you have a 15-year mortgage it’s fun watching the balance owed column on your mortgage statement decreasing more rapidly since more of every monthly payment is devoted to principal. And if you have the extra funds to make additional principal payments you can really get your mortgage paid off fast.
Should I Refinance to a 15 Year Mortgage?
When deciding whether to refinance from a 30-year mortgage to a 15-year mortgage, financial planners will say that homeowners should be sure they are still able to save for retirement and save money for a kids college education after taking on the slightly higher payment of a 15-year loan. Assuming those retirement and savings goals remain unchanged when considering a 15-year mortgage, paying off one’s mortgage faster is another one of those retirement goals that we all should strive for.
If needed, consider taking steps to cut costs in other areas so you can afford to take on the slightly higher monthly payment that comes with refinancing to a 15-year mortgage. If you are planning to buy a car sometime soon, consider buying a used car instead of a new car so your payment is as low as possible, ideally $300 or less. Avoid buying a new car and taking on the expensive car payment that comes with a new car purchase.
Consider all options when considering a mortgage refinance of your existing mortgage. Even after you buy a home and you’ve been in the home for several years it doesn’t hurt to keep in contact with your mortgage loan officer to stay in tune with interest rates and any financial options that may be beneficial for you.
What is a No Closing Cost Refinance?
When refinancing a loan, most homeowners don’t want to have to come out of pocket for any costs to do the loan. That is certainly possible, and the way mortgage lenders do this is simply to add the loan costs in to the loan. The actual costs to complete a mortgage refinance are added to the loan amount and by structuring the loan this way allows for the refinance to be completed with minimal out-of-pocket costs.
Adding loan costs on to the loan amount is quite a common practice that lenders use to accommodate the wishes of our borrowers. The alternative is to pay the loan costs out of pocket at closing and when this option is presented it is almost 100% that borrowers do not want to pay any loan costs out of pocket.
What are Average Refinance Closing Costs?
When you bought your home as a purchase transaction you paid the same type of closing costs on your transaction as you will when you refinance your loan. The difference is refinance closing costs are less expensive than purchase loan costs since the title companies have reduced fees for refinance loans.
While the costs to refinance may be lower than when the home was purchased, the types of costs that are paid on a refinance are the same. Here are some of the common refinance closing costs when refinancing in to a new loan.
Appraisal Fee
When refinancing the current loan on your home, the lender will need to establish the new and hopefully higher value of your home, and to do this will require an appraisal to be done. The lender must have a proper appraisal done by a licensed Appraiser that is approved to work with your chosen lender. The lender that is handling your refinance transaction will order the appraisal and they will coordinate which appraiser has availability and is best qualified to appraise your type of property.
Discount Points
While not required on a loan, borrowers have the option to pay discount points at closing as a means of obtaining a lower interest rate. In many cases, the par rate, or the rate offered by your lender with no discount points will be totally to your liking. In this case, you would simply let your lender know that you are happy with the par rate and he/she will lock your interest rate at that par rate.
However, sometimes the opportunity arises to obtain a lower interest rate by paying discount points at closing. Each point costs 1% of your loan amount, so if you have a $200,000 loan, one discount point would total $2,000. Discount points can also be more or less than the 1% example and your lender should give you several interest rate options when it comes time to lock your interest rate.
Title Insurance
A new title insurance policy is required when there is a new mortgage loan being placed on a home. The title insurance policy insures the homeowner(s) against any title defects, liens or encumbrances existing as of the date of the policy and not specifically excluded from it.
The title company coordinates much of the paperwork that is involved when a new mortgage is put in place and a title insurance policy is an important part of that new paperwork.
Is a 15 Year Mortgage Refinance Right for You?
The answer to this question in most cases depends on how long you plan to stay in the home. Most people that refinance to a 15-year mortgage have plans to hold on to their home one way or the other and never sell. In this case, the goal is to shorten the term of the mortgage and get the loan paid off as soon as possible.
Everyone’s financial situation is unique to them so it helps to review your financial goals on a yearly basis to make sure you stay on track with your objectives. If you like where you live and you plan to stay in your home for more than five years, you may want to consider a 15-year mortgage if a slightly higher monthly payment is something you are comfortable with.
If you want to consult with a mortgage loan officer to talk about your refinance options, please reach out to me anytime via phone or email. My phone number is listed on the Contact Us page on this website, and my email is steveATthehomebuyinghub.com.
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