With mortgage rates at historic lows, now is a great time to refinance your mortgage. But is a 30 or 15 year mortgage the best option? We spoke with three mortgage experts to find out. (iStock)
Mortgage interest rates hit historic lows last year. When the coronavirus pandemic broke out, the Federal Reserve lowered rates. This made it more affordable than ever to buy a home or refinance an existing mortgage.
With refinancing rates at historic lows, refinancing orders initially skyrocketed and then decreased and decreased over the year. According to data from the National Association of Realtors, they rose again in late 2020.
One of the biggest decisions people face when refinancing a mortgage is whether to refinance it for a 15 or 30 year loan. In this article, we will look at some factors to consider when choosing the right loan for you. If you are considering refinancing, consider using Credible. You can use Credible’s free online tool to easily compare multiple creditors and see prequalified rates in just three minutes.
Your interest rate
Whether you are considering refinancing your mortgage or not, there are a number of items to consider. The most significant factor that attracts people to 15-year mortgages over 30-year mortgages is the interest rate. According to Freddie Mac, in the first week of February, the average rate on a 30-year mortgage was 2.73%. But the rate on a 15-year loan was only 2.21%.
Suppose you refinanced a $ 300,000 mortgage balance with a 30-year loan. You can expect to pay $ 139,865 in interest over the life of the loan. With a 15-year loan, you would pay only $ 52,763. That is a difference of more than $ 87,000. This is where the comparison between your current mortgage and a mortgage refinance pays off.
A website like Credible can be of great help when you are ready to compare loans to refinance mortgages. Credible allows you to view pre-qualified rates from multiple lenders, all in minutes. If you want to increase equity in the current property you own or if you only want lower monthly payments, Credible can help. Visit Credible today to get started.
The monthly payment
Another consideration when choosing between a 15 and 30 year mortgage refinancing is the monthly payment you will pay. With a 15-year loan, you are paying your balance twice as fast. As a result, you will have a higher monthly payment, but a lower overall interest rate.
“For many buyers, the challenge with a 15-year term is accessibility,” said Chris Birk, Director of Education at Veterans United Home Loans. “Compressing your mortgage payments into a shorter period means that you are paying more of the principal and interest each month than you would pay over a 30-year term. That higher payout can stretch budgets, limit your purchasing power, or even put homeowners out of reach for some buyers. “
According to Birk, there may be a more effective way to save money on interest while leaving room for maneuver in your budget.
“Buyers can also create a more flexible middle ground by taking a 30-year term and making additional payments to their principal balance each month or year,” said Birk. “Most loans today do not come with prepayment penalties, which means that you can repay your loan ahead of time without incurring any fees or charges.”
An online mortgage refinancing calculator can help you determine your new monthly costs and whether a 15-year refinance would be affordable for you.
Your other financial goals
When weighing the refinancing options for a 15-year mortgage versus a 30-year mortgage, it is important to consider your other financial goals. Because of the higher monthly payments, 15-year loans mean less money available in your budget for other expenses.
“Generally, only people who are already saving enough for retirement, have an adequate emergency fund and do not have credit card debt should consider a 15-year loan instead of a 30-year loan,” said Brian Walsh, SoFi CFP. “If you do not meet these criteria, it is probably best to focus on the fundamental aspects of your finances before aggressively paying low-cost debt, such as a mortgage.”
On the other hand, some financial goals may inspire you to opt for the 15-year loan and pay off your loan more quickly. Suppose you plan to retire in the next 15 to 20 years and want to have your home immediately when that time comes. In that case, a 15-year mortgage may be the best option.
Your credibility
While lower interest rates can be attractive, not everyone will qualify for a 15-year refinancing loan, as they generally have stricter eligibility criteria. If you have bad credit, this can be problematic.
“When assessing who qualifies for a refinance, creditors, look at criteria like debt-to-income ratio, credit score, employment history and other factors that portray a person’s financial situation and creditworthiness,” said Glenn Brunker, President Ally Home. “So make sure you are entering into a home mortgage process with a solid foundation in all of these factors.”
Next steps
The 15 and 30 year refinancing loans come with exclusive benefits and there is no one right answer for everyone. The pros and cons vary, so it is important to consider your financial situation to decide which option is best.
For help choosing the right refinancing loan for you, visit Credible to get in touch with experienced credit agents who will answer all your mortgage questions. Credible also has a free online tool where you can compare multiple mortgage lenders and see prequalified rates in just three minutes.