Refinance to a 15-year mortgage: A smart move in 2022

Michele Lerner
The Mortgage Reports contributor

Should I refinance to a 15 year mortgage?

Low rates drive many homeowners to refinance their mortgages, but most will opt to refi their 30-year fixed-rate mortgage with a new 30-year loan.

Yet homeowners who refi into a 15-year loan pay off their mortgages sooner. 

Because lenders usually charge higher interest rates on longer-term loans, a 15-year refinance can save thousands of dollars in interest. And you’ll own your home in half the time.

But there are drawbacks to a 15-year refi, too, including closing costs and higher mortgage payments. 

Here’s how to tell when you should refinance to a 15-year mortgage loan.

Verify your 15-year mortgage eligibility. Start here (Jan 24th, 2022)

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How refinancing into a 15-year mortgage loan works

A mortgage refinance is when borrowers get a new loan to pay off their existing loan. With a 15-year refi, homeowners can pay off their 30-year mortgage with a new 15-year home loan, and then make monthly payments on their new shorter-term loan.

Many homeowners end up paying a lower interest rate and owning their properties sooner by refinancing from a 30-year mortgage into a 15-year mortgage. 

Keep in mind, a refi comes with closing costs. And you’ll probably make higher monthly payments on your new mortgage loan, which means less cash flow. 

However, closing costs can be negotiated, potentially making refinancing into a 15-year loan more appealing. 

The lower rate advantage

A 15-year loan typically carries a lower interest rate than a 30-year loan. For example, one lender might be quoting a 30-year fixed-rate mortgage at 4.375% and a 15-year fixed-rate loan at 3.625%.

That’s a difference, or “spread,” of 0.75% — a pretty substantial difference in mortgage interest.

Factor in the lower rate and the shorter loan term, and you would save around $150,000 in interest repayment on a $300,000 loan.

Verify your 15-year mortgage eligibility. Start here (Jan 24th, 2022)

Benefits of refinancing with a 15-year home loan

Borrowers who have held their current mortgage for several years needn’t “start over” with a new 30-year fixed-rate loan. 

A 15-year refinance can help you reach your financial goals by:

  • Eliminating mortgage insurance. Private mortgage insurance (PMI) on a conventional loan can be eliminated when you have 20% in home equity. FHA mortgage insurance premiums continue for the life of the loan — but you can often refinance to remove them. Dumping $150 or more in mortgage insurance premiums each month can make a 15-year loan affordable
  • Using your home equity for home improvements. A 15-year cash-out refinance can be used to make home improvements that may increase your home value as well as its livability. At the same time, the shorter loan term means you can build equity even faster
  • Consolidating credit card debt. Paying off your credit card can be a good use of the funds from a cash-out refinance, particularly when coupled with a shorter loan term. Within 15 years, you could be completely debt-free
  • Consolidating mortgage debt. Rising interest rates and the end of the initial interest-only phase of a home equity line of credit (HELOC) could mean a spike in your monthly payments. With enough home equity, you may be able to wrap your HELOC or home equity loan into one mortgage with a 15-year term. Interest rates on 15-year fixed loans are usually lower than home equity rates, and they won’t increase
  • Preparing to retire. One of the most common reasons for a 15-year refinance is to manage your retirement timeline. Many homeowners want to own their home without a mortgage loan in their retirement. Other goals include selling their current home with sufficient equity to be able to pay cash for a retirement property
  • Consistent monthly payments. A 15-year refi could make sense, depending on our loan type. Borrowers with an adjustable-rate mortgage (ARM) may refinance into a 15-year fixed-rate mortgage (FRM) to benefit from the stability of regular monthly mortgage payments

How much you can save refinancing from a 30-year mortgage to a 15-year loan

While 15-year home loans clear your mortgage debt in half the time, you won’t be doubling your monthly mortgage payment to achieve this.

The scenario below shows how a 5-year-old loan might look if you refinance at today’s 15-year refinance rates.

  • Original mortgage balance: $300,000
  • Original interest rate: 4.86%
  • 30-year mortgage payment: $1,585
  • Current loan balance/new loan amount: $275,000
  • 15-year mortgage payment: $1,965 (~$400/mo more than 30-year loan)
  • Remaining interest to be paid on 30-year loan (~25 years remaining): $270,000
  • Total interest on new 15-year loan: $145,000
  • Total interest saved by getting a 15-year loan now: $125,000

Play around with the numbers in our refi mortgage calculator to determine how much a 15-year refinance can save you.

Best candidates for 15-year refinance mortgage

Refinancing into a 15-year loan makes particular sense for homeowners who have been paying their mortgage loan for several years. It’s also a good option for those who have been paying extra to reduce their principal balance.

In addition, homeowners who have reaped the benefit of rising home values are more likely to qualify for a 15-year loan, because they will have a lower loan-to-value ratio.

Disadvantages of a 15-year refinance: Higher monthly payments

Depending on your financial situation, refinancing into a 15-year mortgage could result in the same or even lower principal and interest payments. Your lower balance and better interest rate could offset the reduced loan term.

In many cases, though, the shorter loan term means your monthly mortgage payments will be higher — despite a lower interest rate. Even so, a 15-year refinance could make sense financially.

If a 15-year refinance doesn’t fit your budget, you can always consider refinancing into a 20 or 30-year loan. 

You could still make higher monthly payments to eliminate your mortgage faster and reduce the amount of interest you pay. This method provides flexibility that may be a better financial option for some homeowners.

What are today’s mortgage rates?

Today’s 15-year and 30-year mortgage refinance rates continue to drop, according to Freddie Mac. So now could be an advantageous time to replace your 30-year loan with a new 15-year loan.

The spread between 30 and 15-year loans is always a consideration when you choose a refinance loan.

Bear in mind that the interest rate you qualify for will depend on a number of factors, including your credit score, debt-to-loan ratio, type of loan, and the current equity in your home. 

Also, the lender underwriting your loan affects your refi rate — so be sure to shop your refinance around with multiple mortgage providers.

Verify your new rate (Jan 24th, 2022)