Want to pay off your mortgage early? Consider a 15-year refinance

January 28, 2020 - 6 min read

When rates are low, a 15-year refinance makes sense for many

In the second half of 2019, mortgage rates fell to their lowest level in nearly three years. And they’re expected to stay down in 2020.

With interest rates this low, many homeowners are considering refinancing their 30-year mortgage to a 15-year term.

Lower rates make a 15-year refinance affordable for many, helping counter the higher payment that comes with a shorter loan term.

A 15-year mortgage also means you’ll pay off your house sooner, and pay thousands less in interest over the life of the loan.

Is refinancing to a shorter loan term best for you? Find out here.

Find low rates for a 15-year mortgage

In this article:

Comparing 15-year versus 30-year mortgages

The most popular mortgage program in the U.S. is the 30-year mortgage. In fact, when buying a home, 85% of homebuyers choose 30-year fixed-rate mortgages.

The reason most homeowners choose a 30-year mortgage over a 15-year is it has the lowest monthly payment. But there are pros and cons to both types.

 15-year mortgage30-year mortgage
Pros Lower interest rate
Less interest paid over life of loan
Lower monthly payment
Bigger home buying budget
Cons Higher monthly payment
Smaller home buying budget
Higher interest rate
More interest paid over life of loan

To see how those pros and cons play out in real life, take a look at an example.

Here’s how interest and monthly payments might add up for a 15-year loan versus a 30-year loan on the same home:

 30-year mortgage15-year mortgage
Loan size$200,000$200,000
Interest rate4.25%3.75%
Monthly P&I payment$980$1,450
Total interest over life of loan$154,200$61,800

Most people assume that because you’ll be paying a 30-year mortgage for twice as long as a 15-year mortgage, you’ll pay twice as much interest over the term of the loan.

But the reality is that higher interest, paid over a longer term, compounds more quickly than that.

In the example above, you’d pay about $92,000 more in interest on a 30-year loan than you would on a 15-year loan. That’s almost 150% more interest altogether.

And remember, those numbers are for a $200,000 loan — meaning the additional interest you pay for a 30-year versus 15-year mortgage is almost half the total loan amount.

So, just how much of that extra interest could you save by refinancing?

Get a custom refinance quote to see your savings

A 15-year refinance can save you lots of money

Refinancing into a 15-year mortgage can shorten your loan term and your overall cost considerably.

Say you bought your house with a 30-year mortgage. After three years you refinance into a 15-year loan. Ultimately, you’ll pay off the house in just 18 years (as long as you don’t refinance again).

>> Related: How often can you refinance your house?

You’ll also save a lot in interest, even though your monthly payment will be higher.

See how a refinance after three years cuts your overall cost, using the same example as above:

 Continue with 30-year loan after 3 years15-year refinance after 3 years
Loan balance$189,400$189,400
Interest rate4.25%3.75%
Monthly P&I payment$980$1,400
Interest remaining$130,350$59,760

>> Related: Refinance calculator — calculate your own savings

There are other benefits to a 15-year refinance, too.

You can build equity faster, and potentially be debt-free much quicker than you otherwise would.

But it’s important to remember the big drawback to a 15-year refinance: Your monthly payment will be a lot higher than it was before.

If you make more money now than you did when you got the loan, or if you have fewer debts, a higher mortgage payment might be just fine.

But for some, having to spend a bigger chunk of their monthly income on housing just won’t make financial sense.

But you have other options for paying off your mortgage early, too.

Two options: Refinance to a 15-year term or pay off your mortgage early

When considering a 15-year refinance, homeowners should carefully consider the impact a higher payment may have on their finances.

Evaluate your budget and how the higher payment could affect your ability to pay other monthly debts, as well as your capacity to invest.

Remember: if you make a payment for less than the amount owed, it’s a late payment. That can wreck your credit or even put your home in jeopardy. Your risk is much lower with a 30-year loan.

And don’t forget — refinancing comes with closing costs just like your original mortgage did. You’ll want to be sure the long-term savings of a refinance outweigh the upfront costs.

Get custom refinance quotes to see your monthly payment

Paying off a 30-year mortgage early

With the required payment for a 30-year mortgage being lower than a 15-year, you have a little more flexibility within your monthly budget.

That can come in handy if your income changes, if you lose a job, or have financial emergencies to cover.

And you still have the option to pay off your loan faster.

If your goal is to be debt-free, but you can’t commit to a 15-year refinance, you might consider simply making extra payments on your 30-year loan.

If your goal is to be debt-free, but you can’t commit to a 15-year refinance, you might consider simply making extra payments on your 30-year loan.

By making extra payments of just $100 per month, you could cut five years off your 30-year.

Or, if you have a lot of extra cash, you could pay more each month, say, $500 — and effectively cut your loan down to 15 years and save $82,200 in interest. Following is what you’d pay on a new $200,000 loan.

 30-year loan paid off in 30 years30-year loan paid off in 15 years15-year loan paid off in 15 years
Interest rate4.25%4.25%3.75%
Monthly P&I Payment$980$1,480$1,450
Total interest over life of loan$154,200$72,000$61,800

The catch with this strategy is that you still pay more than if you were to refinance to a 15-year loan. This is due to paying a slightly higher interest rate on the 30-year mortgage as compared to the 15-year.

But, that extra flexibility with monthly payments is invaluable for some.

You can always choose to skip adding the extra $500 payment. This could be important if you experience a loss of income or higher expenses at any time in the future.

What are today’s mortgage rates?

According to Freddie Mac, mortgage rates fell to their lowest level in thirteen weeks.

Regardless of the loan term, interest rates are low. A refinance could save you a lot of money.

Get quotes from a few different lenders to compare interest rates and loan terms. Then decide which option is best for you.

Time to make a move? Let us find the right mortgage for you

Craig Berry
Authored By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.