How to save money with a 15-year mortgage refinance
Update from April 17: After remaining stable for the past two weeks, interest rates have dipped slightly this week to 3.31%, just 0.02% from the historic low of 3.29% set at the start March, resulting in higher refinancing activity as homeowners look for ways to lower their monthly payments.
Mortgage rates are at record highs and homeowners are rushing to refinance. But many might leave their best option on the table.
With the turmoil in the stock and bond markets, mortgage rates have fallen to near record highs. According to Freddie mac, the national average rate for a 30-year fixed-rate mortgage was 3.65% for the week ending March 29.
And it’s not even the lowest mortgage rate: The national average rate for a 15-year fixed-rate mortgage has fallen to 3.06%.
“Typically, if you want to refinance to take advantage of the rates, you need a spread of 50 basis points and your return on your investment is typically two and a half years,” says Thomas Forker, senior vice president. Chairman of Bryn Mawr Trust. This is a rule of thumb; you will want to do your own calculations. For example, real estate data and advisory firm Black Knight uses a spread of 75 basis points – or 0.75% – as a reference to determine if a refi is right for you.
While most people think of refinancing to reduce their monthly mortgage payments, refinancing into a 15-year loan can be economically wise for some homeowners. Only about one in ten mortgages are written for a 15-year term, but it’s an option experts say more homeowners looking to refinance should consider.
“You really want to put yourself on the shortest term you can afford and go for it,” Forker explains.
Not only is the interest rate itself lower, he says, but you’ll actually end up paying a lot less to pay off that debt over the life of the loan. Here’s how the math breaks down for a hypothetical scenario: Let’s say you bought a house five years ago and took out a $ 250,000 mortgage at a 4.5% rate. If you refinanced with another 30 year loan at current rates (about 3.65%), you would save $ 5,000 and increase your monthly payment from $ 1,266 to $ 1,044.
That might sound good, but consider this: If you refinanced into a 15-year loan at the current 3.06% rate instead, your monthly payment would be $ 1,583 – but over the life of the loan, you would save a whopping $ 96,500.
You can also divide the difference. While not as common, if you go for a 20-year mortgage, you can probably get a slightly lower interest rate (currently around 3.4%). Your monthly payment is around $ 1,312 and you save $ 66,500 compared to not refinancing at all.
“You can save a lot of money in the long run by lowering the duration,” says Forker.
Of course, this won’t be a viable option for everyone. If you have high interest debt like bad credit card balances, experts say it makes more sense to free up extra money on a monthly basis so you can pay off those debts.
And paying more per month is not something that fits every household budget. But especially for first-time homebuyers who are considering refinancing, there’s a good chance you’ll earn more today than when you bought your home if you were a young adult not yet in your earning years. .
“A payment that was inflated when they first bought the house is a more comfortable amount today,” Forker said.
The other thing to keep in mind about refinancing is that if you roll over a 30-year mortgage into a new 30-year loan, you are extending the time it takes to fully pay off your mortgage.
“When refinancing, it’s not always about lowering the rate to refinance. It also matters how long you’ve been in the current loan, ”says Jacqueline Racz, loan officer at Developer’s Mortgage Company.
For those considering retirement, this is an especially important consideration: Do you want to postpone retirement, potentially for years, or take the risk of having to make mortgage payments on a fixed income? Yes, you can pay off your mortgage up front, but it takes financial discipline.
“There are times when a shorter term makes sense,” says Brent Weiss, co-founder of financial planning firm Facet Wealth. “If a homeowner is about to pay off their mortgage, it might not make sense to reset the clock. “