Mortgage interest rates are at all-time lows right now. It’s obviously a great time to refinance for lower rates and payments. Perhaps you are interested in paying off your mortgage loan faster though. Is refinancing into a shorter loan a good idea right now too?
A 15-year fixed rate home loan is a popular option for borrowers looking to be mortgage-free sooner. These shorter loans come with even lower interest rates than 30-year mortgages, allowing homeowners to save thousands in interest. For example, for a borrower with a home valued at $300,000 with a 20% down payment, the interest rate on a 15-year mortgage might be something like 2.5% compared with 3.0% for a 30-year mortgage. At those rates, the total mortgage costs would be $348,052 and $424,266, respectively. The 15-year loan would produce a savings of $76,213 over the 30-year mortgage.
Higher Monthly Payments
Of course, those interest savings come at the cost of higher monthly payments. In the example above, the 15-year mortgage payment would be $1600 a month, compared with just $1,012 for the 30-year loan. That’s a significant upfront investment and some borrowers might benefit more from having that cash at their disposal, rather than tied up in their house. That can be true in times of a rocky employment market as well as in more prosperous economic times when borrowers can find greater returns by investing that extra money. Those considering refinancing into a 15-year loan should make sure that higher payments fit in with their budget, keeping a cushion for unexpected financial emergencies.
Getting Out of Debt Before Retirement
If you can afford the higher payments, now is a great time to get rock-bottom rates on a shorter loan. By paying it off in half the time, many borrowers can ensure that they will own their home free and clear before they hit retirement age. The elimination of that giant debt load can bring great peace of mind when you make the switch to a fixed income.
Alternative: Extra Payments
Refinancing does come with costs though. There are closing costs and sometimes points to be paid. And if you have already been in your current home loan for many years, you may not need to swap loans to realize the desired savings. You always have the option to simply make bigger monthly payments, throwing more at the loan principal and reducing your payoff timeline on your own. This option allows you to save on interest, but also gives you the flexibility to go back to the lower payments if you hit a rough financial patch or if you need to use the extra funds for medical emergencies or kids’ college tuition. This route does take more personal discipline though, if you truly want to be able to pay off your mortgage faster and save as much money as you would with a 15-year home loan.
If it fits your situation, now could be a great time to refinance into a 15-year mortgage because of the ultra-low rates. You could also save money by making consistent extra payments on your current home loan. The option that is right for you will depend on your budget, your self-discipline, and your other financial goals.
Let Mortgage Services help you get a lower mortgage rate. Give us a call today at 650-703-0758 .