Refinancing your mortgage? Don’t make this mistake
Before you refinance your mortgage, consider which loan term works for you. (iStock)
As the coronavirus pandemic rages on, it continues to have an undeniable impact on American finances. According to data firm Black Knight, more than 2.3 million homeowners remain 90 days or more past due on their monthly mortgage payments as of October 2020. However, one silver lining of this current economic environment is record-low mortgage rates.
These lower rates may lead you to wonder if refinancing your home loan is the right move. Credible can help make this decision for you. Just plug in your information into their free tools to get a variety of loan options and see what refinance rates you prequalify for.
While browsing loan options, don't just keep your eye on refinancing rates — your loan term is just as important. Before changing the terms of your current loan, consider these pros and cons.
Drawbacks of choosing another 30-year mortgage
Put simply, you may be better off choosing a shorter loan term. To that end, we’ve laid out the benefits of choosing a 15-year loan over a 30-year loan below. Armed with this knowledge, you should be able to determine if choosing a shorter loan term might be right for you.
1. You start the clock all over again
The first thing to know about refinancing your mortgage and getting another 30 year home loan is that you effectively start the clock all over again on your mortgage payments. After all, when you refinance you are simply taking out a new loan to pay off your old one, which means that it will take you another 30 years from the date you refinance to pay off your loan in full.
While this may not be such a big deal if you just took out your home loan a few years ago, if you've been paying down your existing loan for a while, you may not want to leave that much time until you paid off your house in full. In that case, simply paying more into your existing loan might be a better option.
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2. You’ll pay more over time
The other drawback of choosing a 30-year loan for a home refinance is that, even with today's low rates, you'll likely end up paying more money and interest charges over time. Here, interest will accrue on the loan for 30 years as opposed to 15 years, which will increase the total amount of interest that you will end up paying before the loan is finally paid off.
With Credible, you can be confident you'll find a rate that fits you best. Credible can show you daily mortgage and refinance rates for both 30-year fixed-term loans and 15-year fixed-term loans. Click here to view today's mortgage rates and compare loan options instantly.
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Instead, consider refinancing into a 15-year mortgage
Choosing a 30-year mortgage loan term is a popular choice among home buyers, but opting for a 15-year fixed-term may actually be a better bet (if you can handle the monthly mortgage payments). Here are some benefits of a 15-year mortgage.
1. You’ll likely get a better interest rate
Besides getting a lower interest rate, there is another reason why you might save more if you go with a 15-year loan when you refi - you'll often be offered lower rates. To give you some context, the average rate on a 30-year loan is 2.80%, according to Freddie Mac. Meanwhile, the average rate on a 15-year loan is only 2.33%.
Plug your information directly into Credible's free online tool now to compare rates and loan options.
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2. You’ll pay it off faster
“Refinancing into a 15-year loan gives homeowners the ability to see the proverbial light at the end of the tunnel of having a home that is paid off, which is a huge benefit as they head toward retirement,” says Jonathan Bednar, CFP and Owner of Paradigm Wealth Partners in Knoxville, TN.
With a 15-year loan, your amortization schedule will be condensed, which means that you have the ability to pay off your home faster. However, keep in mind that also means that you will have a higher monthly payment. You'll need to make sure that you feel comfortable paying more each month before going this route.
While all homeowners could save money by refinancing, opting for a 15-year mortgage over a 30-year mortgage could save even more money. Take advantage of today's lower rates with a mortgage refinance. Credible can show you recent trends with 15-year fixed rates and help you get prequalified rates within just minutes after filling out some simple information.
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3. You’ll pay less money overall
The last benefit of refinancing into a 15-year loan is that you will pay less money in interest overall.
For example, if you own a $300,000 home and you refinance into a 30-year loan at an interest rate of 2.8%, your monthly payment would be $1,269.48 and you would pay $115,012.80 in interest over the life of the loan.
In contrast, if you were to have a 15-year loan on the same home with the same interest rate, your payment would be $1,917.74 monthly and you would only pay $54,193.49 in interest over the life of the loan.
Use an online refinancing calculator to see how much you could save on mortgage payments.
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The bottom line
Lower interest rates aside, keep in mind that refinancing into a 15-year loan is not the right move for everyone. You also have closing costs to consider. According to Bednar, it can take 2-3 years to pay off your closing costs, so if you’re not planning on staying in your home for that long, it will be important to speak with a lender before you refinance.
Visit Credible to compare rates and lenders. You can also use Credible to get pre-qualified today.