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Should I Refinance to a 15-Year Mortgage?

A 15-year mortgage can help you build equity and pay off your loan, or it can be a huge burden.

A 15-year mortgage can help you build equity and pay off your loan, or it can be a huge burden.

Pros of Paying Off Your Home Quickly

I refinanced my family's biggest asset, our home, to a very conservative 15-year fixed rate mortgage. Is it right for you? That depends.

I figured that by refinancing our mortgage, we would free up an extra five years of my husband's annual income for use in other things. Our mortgage payment was about $1200 a month and not paying our mortgage for five years means many things to us—helping children through college, boosting our retirement savings, or buying a small retirement home in a desirable location while we turn our paid-for family home into a revenue-generating rental.

Suze Orman says in her books that for a middle-income family, owning their home free and clear can have an emotional and psychological effect beyond the money savings. I agree. With a home that is paid for, I will have a home that only requires annual tax payments in my later years, when my income will probably be reduced.

I Am Not a Mortgage Agent, But This Was My Process

I am not a mortgage agent, nor do I work in any part of the housing industry. I'm a stay-at-home mom and was looking for a way help my family get ahead.

  1. I Checked the Equity: I discovered that after being in our home for almost five years, we had accrued VERY LITTLE equity on our house. Why? Because our 30-year loan was set up to pay most of the interest before we paid off principal (the part of the house payment that pays off the loan.)
  2. I Comparison Shopped: Out of curiosity, I began doing some comparison shopping online. Using interest rate calculators and loan-comparison wizards, I was able to determine that if we refinanced our home and paid a higher mortgage payment, we would be able to build equity much faster.

30-Year Loans vs. 15-Year Loans

In a traditional 30-year loan, during the first 15 years, you build little equity as you pay off the interest due. Meanwhile, from day one of a 15-year loan, your loan pays approximately half interest and half principal.

Here is a rate comparison for a $100,000 mortgage. In today's rate environment, most Americans would be thrilled to pay on "only" a $100,000 mortgage, and it seems like an easy round number to work with.

Typically, the point spread between a 30-year and a 15-year loan is about 1/2 of a percentage point. I chose to compare:

  • A 30-year, 100K mortgage at 5.75%
  • A 15-year, 100K mortgage at 5.25%

This is what the amortization table looks like:

30 Year Fixed, 100K loan, 5.75%

With a 30-year loan, in your first 5 years you only build $5000 in equity. If you move during the first 3-5 years, you will have very little to show for it.

With a 30-year loan, in your first 5 years you only build $5000 in equity. If you move during the first 3-5 years, you will have very little to show for it.

15 Year Fixed, 100K loan, 5.25%

The loan payment for this loan is higher, at $803.88. If you don't have room in your budget, this could be a huge financial mistake...but, if you DO have the money to cover the higher payment, you could have $20,000 more equity in just 5 years.

The loan payment for this loan is higher, at $803.88. If you don't have room in your budget, this could be a huge financial mistake...but, if you DO have the money to cover the higher payment, you could have $20,000 more equity in just 5 years.

What Questions Should I Ask Myself?

Although refinancing to a 15-year loan has some strong advantages, they come with a price. Your loan payment will higher—possibly much higher. Our increased loan payment put a strain on our budget that was uncomfortable at times. If your home is a starter home and you have two incomes contributing to your loan payment, this may not be a significant factor. But if you are making loan payments on a modest one-income budget, or if you bought the most home you could afford on a 30-year loan, then you may want to consider how a significantly higher loan payment will affect your family budget.

Credit card debt, student loan debt, or other personal circumstances may make a 15-year loan an undue burden on your family's budget. In an economy with skyrocketing fuel and food costs, you may do better to hold onto your money.

How much will it cost me to refinance? (Ours cost almost $4,000).

  • Do I have good credit and will my rate be lower now if I refinance?
  • Can I afford to be locked into a higher payment?
  • IF you have the self-discipline, you could make an extra payment instead of refinance. There are online calculators that explain how to do that too...
  • Do I have enough financial reserves to make the payment if I get behind?
  • Does my family plan to stay in the house for about 5 years to pay for the extra costs of refinancing?
  • Is my house still worth what I paid for it? You are probably ok if your house is 6 years old or older, but you investigate the value of your home and consult an advisor before making any financial moves.
  • Could I make more money using the extra payment in a different investment?

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2008 Carolyn Augustine


Marian Cates from Stevenson, WA on April 21, 2020:

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A better alternative? Prepay your existing 30-year loan.

Carolyn Augustine (author) from Iowa on October 20, 2013:

I agree. The only place where I might take another look though is if the family in question can see this house turning into a rental property at some future time. And that happens a lot more often than we think. Job changes and other circumstances can change a family home into a rental. In that instance, if the 15-year loan payment is higher than the amount of rents that can be received, the higher payment may become a strain. Just playing devil's advocate! I have a 15 year loan on my house and I can see the light at the end of the debt tunnel!

mortgage-news from Los Angeles, CA on August 01, 2013:

I think that people forget when they are refinancing a 30 year mortgge into another 30 at a lower rate, yes your payments will drop but you are extending the amount of time it will take to pay off your house. If you can swing it, try to go for the 15 for an even lower rate, even if monthly payments go up.

Carolyn Augustine (author) from Iowa on July 28, 2012:

So true, Monica. If you can't swing a 15-year or even if you're just cautious about making the financial commitment, you can save a lot by putting extra down.

monicamelendez from Salt Lake City on July 28, 2012:

I thought about doing a 15 year mortgage when I bought my house back in March. I decided I wasn't willing to get locked in. But, I've been paying a lot extra every month in fact I've already paid three years of my mortgage off. It's pretty amazing how little extra you have to pay now to make a huge dent in the end of a 30 year mortgage.

Carolyn Augustine (author) from Iowa on May 24, 2012:

Thanks, SoManyPaths, I absolutely agree. I think having a 15 or 20 year loan is an excellent way to commit to building equity fast. If I could do it all over again, as a first-time home-buyer I would purchase an affordable small home and make big payments on it to build up as much equity as possible. My only precaution would be to think about what kind of exit strategy a 15-year loan would leave: if you needed to sell your home and were unable to do so, could you rent it out and still cover your mortgage payment at the 15 to 20-year rate?

After we refinanced to a 15-year loan we ended up selling because we were no longer living in the home and couldn't legally refinance to a 30-year loan after we moved.

SoManyPaths from West Coast USA on May 14, 2012:

Nice hub. I am looking into a purchase loan but only 15 or 20 yr plans. Equity will rise in the next 10 yrs and we pay it off faster at low low rates. You can't beat that. Unless, you want to live in the home with a 30 yr for 7 years and move to something else. It depends on the person situation.

None. on October 01, 2010:

Other than the emotional side of things, it looks like this is pretty much a break-even scenario. You could of made the same increased payment on your 30 year loan & accomplished the same thing.

Carolyn Augustine (author) from Iowa on September 19, 2008:

Thanks Wisconsin,

I believe that a 15-year loan is one of the steps to true financial freedom, and is one of the best ways that an average middle-class person can build security and sometimes wealth. To me, building security is an important part of preparing for retirement. If, like my parents, you're in your late fifties and you STILL owe 15 years on a mortgage, you don't have many options.

That said, our situation suddenly changed and we found ourselves moving. We're not going to make money on our 15-year mortgage, but we won't lose any, either. I strongly encourage people who are considering buying a home to buy less than they can afford so they can pay it off quickly.

wisconsin mortgage rates on September 18, 2008:

I always try and talk my clients into a 15 year loan. People just get fixated on the lower monthly payment of a 30 year mortgage for some reason?

Carolyn Augustine (author) from Iowa on April 30, 2008:

When do you think it's a good idea to refinance to a 15-year loan? Is it ever a good idea? Why or why not?

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