Is a 15 or 30-year mortgage refinance better with today’s rates?

With mortgage rates near historic lows, homeowners are exploring refinancing. When you refinance, you pay off your existing mortgage by taking a new home loan instead. Homeowners opt to refinance for several reasons: to lock in a lower interest rate, to change the term of their loan, or to get cash from the equity they’ve accrued.

Many borrowers struggle when deciding between a 15-year or 30-year loan. The decision to refinance your mortgage into either term is specific to your individual circumstances. Each has its pros and cons. Regardless of the term you choose, be prepared to pay refinancing closing costs, which amount to approximately 3% to 6% of your mortgage's principal, according to the Federal Reserve.

WHO'S EXEMPT FROM THE NEW MORTGAGE REFINANCE FEE?

Pros and cons of a 30-year mortgage refinance

One of the main advantages of taking a 30-year home mortgage is that you’ll likely have lower monthly payments, even if your interest rate is higher.

"Choosing a 30-year mortgage can be ideal for those wishing to maximize cash flow and reduce monthly payment obligations," noted Leslie Tayne, attorney at Tayne Law Group, a New York-based debt solutions firm.

Consider the following example which illustrates the difference in monthly payments for a $150,000 loan:

A 30-year loan with an interest rate of 2.75% will result in a monthly payment of $612, while the monthly payment on a 15-year loan with an interest rate of 2.125% will be $974 — a difference of $362.

To determine new monthly payments based on your loan amount, use an online mortgage refinance calculator.

Another benefit is that borrowers always have the option to pay more than their minimum payment and they can pay off the loan within a 15-year window, but if finances ever get tight, they can revert to the minimum payment.

WANT THE LOWEST MORTGAGE REFINANCE RATES? DO THESE 4 THINGS NOW

"There's a good argument not to pay it down faster since many investments earn an average rate higher than the current mortgage rates," said Matt Stratman, a financial advisor at Western International Securities. "Rather than piling your money into your low-rate mortgage, it makes financial sense to invest additional money into a portfolio that will earn a compounded rate higher than 2-3%. If money is needed, you can usually liquidate most investments to have it on hand rather than being forced to refinance just to access capital."

One of the main drawbacks to taking a 30-year mortgage is that you’ll pay significantly more in interest over the life of the loan. In the example above, total interest for the 30-year option will cost $70,450, while the 15-year will amount to $25,306. That's why it's also so important to compare mortgage lenders and what they can offer.

Pros and cons of a 15-year mortgage refinance

As shown by the example above, the lower interest rate that accompanies a 15-year refinance can save you thousands over the life of the loan.

"Not only does a 15-year mortgage cut the loan’s payoff time in half compared to a traditional 30-year mortgage, it also means that borrowers will build equity in their homes more quickly, making a home equity line of credit (HELOC) or equity loan an option," said Tayne.

But if you experience an unplanned financial setback, such as job loss or illness, making that larger monthly payment may be difficult.

How to get the best refinancing rates

Shopping around is the best way to get the lowest rate on a refi. But make sure you’re comparing apples to apples, cautioned Melissa Cohn, executive mortgage banker at William Raveis Mortgage. Refinancing your home should be a thoughtful process.

"When getting rate quotes, provide sufficient information to get an accurate quote: credit scores, income (adjusted gross income for the last two years of tax returns), loan to value, and if it is a cash-out refi or a straight refi," she said.

HOW TO REFINANCE YOUR MORTGAGE WITHOUT CLOSING COSTS

When refinancing doesn’t make sense

While lower interest rates make a mortgage refi attractive, it may not always be worth it. This is where savings calculations are key - and where a mortgage refinance calculator is beneficial.

"Before you decide to refi you need to determine how much longer you expect to be in your home and what the break-even is after paying closing costs," said Cohn. "If you expect to be in your current home for only a few years longer, it may not pay to refi." It's important that your refinance align with your overall financial goals and lowering your monthly payments in the short-term may not always make sense.

For example, if you pay $2,300 in closing fees, but only save $100 a month, it’ll take two years to recoup those costs. If you’re planning to move before that breakeven point, refinancing isn’t worthwhile. A mortgage refinance calculator can help determine your savings calculations before moving ahead. Visit Credible to get in touch with experienced loan officers and have your mortgage questions answered.