Should You Refinance to 15 Years?
If you’re thinking of refinancing your mortgage, you’ll pay origination fees and closing costs, but it may be worth it to you to get a better interest rate and better terms. Refinancing to a 15-year loan may mean you pay a little more for your refinanced mortgage, but the amortization schedule (how much goes toward interest and how much goes to reducing your principal) is definitely more favorable than a 30-year.
According to Bankrate.com, the average closing costs for a mortgage refinance are about $5,000. Costs will vary according to the size of your loan and the state and county where you live. But you can expect to pay anywhere from 2% to five percent of the borrowed amount. Closing costs can be rolled into the financing, so you don’t have out of pocket expenses, but that will add to the principal that needs to be repaid. For a $200,000 refinance, your closing costs range between $4,000 and $10,000, but you’d save much more than that in interest.
Could you simply make higher payments on your current loan? Yes, any amount you add onto your mortgage payment will reduce principal immediately but it won’t impact your interest rate until you refinance or pay the mortgage off.
TheSimpleDollar.com says it could be easier or cheaper to refinance to a 15-year mortgage. With a 15-year term, you’ll pay your loan off faster and build equity more quickly (your share of ownership compared to the lender), because less money goes to interest and more toward paying down the principal. You’ll get a better interest rate because shorter terms equal lower risks for the lender, so your interest rate should be lower than what you’re currently paying. You’ll also have the opportunity to change the type of loan you want to fit your circumstances and goals. For example, an adjustable rate loan is typically cheaper than a fixed rate, but if you already have an adjustable rate mortgage and it’s about to roll over to higher interest, it could be a good time to refinance. If you think you’ll only be in your home a few more years. It might be better to compromise with a hybrid loan – one with a fixed rate for a given period like five years and that goes to adjustable rates afterward.
Refinancing also allows you to tap into the equity you’ve built and you can use it for remodeling, emergencies, investments, and to pay off major debt such as student loans and other high interest loans. If you use the money to pay off credit cards, be careful that you don’t “reload,” which means adding new debt to your credit.
The downside is that your monthly payment is likely to be much higher, so you’ll need to make sure you can easily handle the difference. You may have less cash for other goals such as savings or investments, but the upside is that you’ll be out of debt faster and that’s a good place to be.