Should I Refinance into a 15-Year Fixed Rate Mortgage?

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Mortgage and Lending with Guaranteed Rate, Marin County, CA NMLS: 22343

Should I Refinance into a 15-Year Fixed Rate Mortgage?

 

With the Federal Reserve tongue-tied and twisted and an easy trade war time-tripping into the future, we find ourselves the beneficiaries of another very appealing low interest rate environment here in the second half of 2019.  This stands to benefit many who have mortgages at higher rates and even some who may not fit that exact bill, but who are focused primarily on reducing the term of their loan and perhaps paying their entire balance off at a faster rate.  We are seeing a number of homeowners who are seeking to determine if they should abandon their 30-year amortized loans and refinance into a 15-year fixed.  What are the key concepts these individuals need to know before they make this leap?

 

For the vast majority, the mortgage payment will go up.  A while back I did the research on this and came up with my "10 and 2" rule.  Namely, if you are in a 30-year loan now and have been paying it down for 10 years, then you refinance into a 15-year fixed rate loan with at least a 2% rate reduction over your present loan, only then would you have a new payment that is the same or lower than your current payment.  And that's a reach.  So for most, refinancing into a 15-year fixed means a higher monthly payment, safe in the knowledge that the additional amount is going to reduce your principal balance and not to additional interest.

 

You save big long-term.  The total finance charge (aka, interest) on a 15-year loan versus a 30-year loan is dramatic.  For example, on a $400K loan at 4%, you will pay a total of $287,478 in interest over 30 years.  On a 15-year fixed at 4%, you will pay $132,575.  But there's a silver lining for the 15.  Often the rate on a 15-year fixed will be lower than for a 30, so not only do you save on interest because of the term, but you save on interest additionally because of the lower rate.  The rich get richer.

 

Be mindful of your credit capacity.  If you refinance into a 15, you'll have a higher payment reporting on your credit report.  Other creditors who may examine your debt-to-income (DTI) as a function of your creditworthiness could limit your access to credit due to the higher payment.  This may or may not be a factor for your financial future, but do take it into consideration before you take the 15-year plunge.

 

It's possible to be debt free but wealth poor.  I realize this sounds funny, and paying off a home is a commendable financial goal, but realize that while you are doing it, most of us also need to meet concurrent objectives when it comes to our money.  Having a "rainy day" fund, paying off any tax-disadvantaged higher-rate consumer debt, saving for college and retirement and investing outside of real estate are important and worthy objectives and if all of your discretionary income goes into a higher mortgage payment, you could find yourself debt-free but savings poor down the road.  That would almost certainly force you to look into refinancing the home again and accessing the equity, likely with a 30-year loan or a HELOC.  Don't laugh, we've seen this movie before...

 

With rates lower, it might indeed be worth looking into a 15-year fixed rate mortgage.  But keep the above points in mind as you do.  Like in physics, all actions have opposite reactions and finance is no different.  Getting a lower rate, paying less interest over term and paying off your home quicker are all enticing objectives.  There is a price to entry, however, and any true loan professional can help you assess that cost.  Let me know if you need my help at any point in your journey.

 

Free and clear, 

 

 

Robert J. Spinosa
Vice President of Mortgage Lending

Guaranteed Rate
NMLS: 22343 
Cell/Text: 415-367-5959 
rob.spinosa@rate.com

 

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960

Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709
 

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate's Human Resources Department.

 

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood ChicagoIL 60613 - (866) 934-7283

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Tags:
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Rainmaker
3,236,068
Sally K. & David L. Hanson
EXP Realty 414-525-0563 - Brookfield, WI
WI Realtors - Luxury - Divorce

Great advice ...too many people automatically think re-fi without doing the homework !

Aug 06, 2019 07:44 AM #1
Rainmaker
1,765,163
Lottie Kendall
Compass - San Francisco, CA
Helping make your real estate dreams a reality

Hi Rob -- you've written the cleanest, clearist post about 15- versus 30-year mortgages in an easy to understand way. I'd like to put a link to your post in my next newsletter -- may I? Rachael Kendall prepares my email version while I handle the printed one.

Aug 06, 2019 07:48 AM #2
Ambassador
3,838,001
Kathy Streib
Room Service Home Staging - Delray Beach, FL
Home Stager - Palm Beach County,FL -561-914-6224

Rob- what I love about your posts is that I can actually understand what you're saying!! And this is excellent food for thought for anyone who is thinking of refinancing. 

Aug 06, 2019 06:11 PM #3
Rainmaker
2,516,408
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

Good advice, Rob.  There are things to consider for each individual thinking of refinancing.

Aug 06, 2019 07:09 PM #4
Ambassador
2,839,622
Anna Banana Kruchten CRB, CRS 602-380-4886
Phoenix Property Shoppe - Phoenix, AZ
Arizona's Top Banana!

Hi Rob Spinosa excellent post and commentary on the pro's and con's or 15 year mortagages  or not.  It's very confusing to many people and hiring a top notch lender, like you, is so critical.  So much to consider.....

Aug 07, 2019 03:27 PM #5
Rainer
140,898
Robin Wells
RAW Chimney Sweep and Inspections - Penetanguishene, ON
Giving Peace Of Mind One Chimney At A Time

Thanks for post and advise.  Too many fail to look at the good and the bad sides and there are always both and they can be constantly changing depending on so many factors.

Aug 07, 2019 04:18 PM #6
Rainmaker
2,494,231
Rebecca Gaujot, Realtor®
Vision Quest Realty - Lewisburg, WV
Lewisburg WV, the go to agent for all real estate

I agree, Rob, this is excellent advice for those thinking of refinancing.

Aug 07, 2019 06:18 PM #7
Rainmaker
81,317
Karen Simms
Century 21 Arizona Foothills - Queen Creek, AZ
Horse Property Specialist

Great advice!  Your article is written so that the consumer can easily understand which is so important.

Aug 07, 2019 11:29 PM #8
Rainer
494,708
Dörte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear Rob,

If you can keep the payment the same, but shorten the re-payment period, that would also be beneficial. As you mentioned, you save a lot of interest overall. Then in 15 years, you can save up for something special in a hurry. New car, cruise, travel; it could be extravagant.

Aug 08, 2019 07:35 AM #9
Rainer
282,121
Ron Aguilar
Continental Mortgage - Saint George, UT
Mortgage & Real Estate Advisor since 1995

Since 1995 I have always illustrated to the borrower a 15 yr term even if they prefer a 30 yr. It requires using a simple amortization schedule or a total cost analysis from Mortgage Coach. After that its a matter of income/debt qualfiying and their desires. Note: not all people can qualify but be careful in over pushing the concept...

Aug 08, 2019 07:49 AM #10
Rainmaker
230,519
Dale Taylor
Re/Max 10 New Lenox Illinois - Frankfort, IL
Realtor = Chicago Illinois Homes Townhomes Condos

I tell all my Buyers as soon as they financially can, refinance to a 15 year, or at the very least try to make an extra mortgage payment annually to reduce the mortgage term to 17 years.

When I look back to how quickly those 16 years have flown by since I custom built my forever home, it could be fully paid for by now.

Fortunately, about 6 years ago I was in the good financial position to refinance to a 15 year, so as I stay on track for retirement, my mortgage is well on the way to being paid off around that time. Yay!

Aug 08, 2019 08:55 AM #11
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Rainmaker
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Rob Spinosa

Vice President of Mortgage Lending, Marin County
Can I Get a Jumbo Loan with 10% Down?
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