One of the rare good things you can say about 2020 is that the lowest mortgage rates ever offered homeowners in the United States huge savings through refinancing.
Is a refi still on your to-do list, something you hope to check in early 2021? If you own a home, have a 30-year mortgage and could benefit from refinancing, it is natural that your first thought is to pull the trigger for another 30-year loan.
You will cut your monthly payment, possibly by hundreds of dollars, and give your budget some breathing space during this period of economic stress.
But there are good reasons to consider refinancing for a 15-year mortgage. Rates for 30- and 15-year fixed mortgages are now at or near record levels, according to the latest weekly survey by mortgage company Freddie Mac.
Personal finance personality Suze Orman says it is wiser to accept a 15-year loan. “Don’t refinance and prolong your years,” she said People in a recent interview.
However, other experts say that shortening your loan term may not be a smart idea – especially during the COVID crisis.
See arguments from both sides to help you decide whether a 30 or 15 year refinance is the right choice for you.
Advantages of refinancing for another 30-year mortgage
It is estimated that 19.4 million Americans with 30-year mortgages can refinance now and save an average of $ 308 a month, mortgage data company Black Knight recently said.
These refi candidates are sitting on loans with rates at least three quarters of 1 percentage point (0.75) higher than current rates on 30-year fixed rate mortgages, which are on average a record high 2.67% in Freddie Mac’s survey. This is just a hair above the recent low of 2.66%.
“The cost of borrowing has never been cheaper for homeowners,” says Grant Moon, founder and CEO of real estate technology company Home Captain.
In early 2020, the typical rate for a 30-year loan was 3.72%.
Fifteen-year fixed rate mortgages come with even lower rates than 30-year loans. Short-term loan rates are now at a lower average of just 2.17%.
But Moon says you had better choose a 30-year mortgage for refinancing in the current environment, because 15-year loans come with much stricter monthly payments.
“Your pay would probably increase and, with the uncertainty surrounding the economy with millions of people receiving unemployment insurance, it could be a dangerous proposition if a borrower loses his job and gets stuck at a higher payment amount,” he says.
A $ 250,000 30-year fixed-rate mortgage at 2.67% has a monthly payment of $ 1,010. The 2.17% 15-year mortgage of the same size has a much steeper monthly payment: about $ 1,628.
Advantages of refinancing for a 15-year mortgage
For borrowers who can manage higher payments, refinancing 15-year mortgages has benefits, says Richard Pisnoy, director of Silver Fin Capital, a mortgage broker in Great Neck, New York.
“They will not only pay a lower interest rate on the loan, but will also reduce the number of years on the loan, saving a huge amount of interest,” says Pisnoy.
With the 15-year mortgage in the previous example – worth $ 250,000 and 2.17% interest – interest costs would be around $ 43,100 over the life of the loan.
A 30-year mortgage at the same 2.67% interest rate would have much higher lifetime interest costs: more than $ 113,600.
Suze Orman says she considers the interest charge for a hypothetical homeowner who is already paying a 30-year fixed-rate mortgage for 14 years.
“Now you decide to refinance and take out a new 30-year mortgage,” she writes on her blog. “Sure, the new mortgage has a lower interest rate, but you’ve just extended the mortgage payment on this house to 44 years! It’s 44 years of interest payments.”
How to make your choice
But Home Captain’s Moon doubts that many homeowners have been on mortgages for more than a decade.
“The refinancing boom in the United States started last May, and many of those who were eligible to refinance – or made sense to do so – have already refinanced,” he says.
Refinancing a new 30-year loan would reduce monthly mortgage costs. Refinancing for a 15-year mortgage would reduce your long-term costs. Ultimately, your decision comes down to how confident you feel about your current financial situation.
While 15-year mortgages have financial benefits, they can be risky, says Pisnoy.
“The borrower needs to understand what the impact of a larger monthly payment will be on his cash flow and any financial impact it will have on him if he loses the monthly income he currently has,” he says.
If you refinance on a 15-year home loan and monthly payments become too high, you cannot just start sending your loan manager 30-year payments. It will not work.
Joining another 30-year mortgage and your lower monthly payments may be the smartest choice if you won’t be staying in the house for long. If you are moving within a few years, what does it matter if you have a 30 or 15 year loan?
Regardless of the mortgage term you choose, make sure you have enough home insurance. Get quotes from various insurers and compare rates to make sure you have the right coverage for the owner at the best price.