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Refinancing to a 15-year mortgage: Items to consider

April 24, 2024 | Posted by: John Murphy

Refinancing to a 15-year mortgage can be a beneficial decision for homeowners. It can help you pay off your mortgage faster and save money on interest payments in the long run. However, there are several factors to consider before deciding if this move is right for you.

First, consider the financial implications of switching from a longer-term mortgage, such as a 30-year loan, to a 15-year mortgage. The most noticeable change will be in your monthly payments. While you will save significantly on the total interest paid over the life of the loan, your monthly payments will be higher. Evaluating your monthly budget is important to ensure you can comfortably afford these increased payments without compromising other financial goals or obligations.

Interest rates are another critical factor. 15-year mortgages can typically have lower interest rates compared to 30-year mortgages. This can further increase the amount of money you save on interest. However, the actual rate you'll get will depend on many factors including things like your credit score, the loan amount, your home's equity, and prevailing market conditions. Being able to compare lending rates from multiple different lenders and considering the timing of your refinance relative to market trends can help maximize your savings.

Equity is another important aspect to consider. Refinancing to a shorter-term mortgage is usually more advantageous if you have substantial equity in your home. If you have at least 20% equity, you can avoid the need for private mortgage insurance (PMI), which can add to your costs. If your equity is less than 20%, refinancing might still be possible, but it could be costlier.

Tax implications should also be considered. While the interest paid on a mortgage is tax-deductible, the reduced interest payments on a 15-year mortgage mean the deduction will be less than what you might get with a 30-year mortgage. While this shouldn't be the sole reason to choose one option over the other, it's a factor worth discussing with a tax advisor.

Finally, think about your long-term financial goals. If you're looking to free up money for retirement savings or other investments, reducing the length of your mortgage and eliminating debt quicker can be a smart strategy. On the other hand, if you're more focused on immediate financial flexibility, a longer-term mortgage with lower monthly payments might be preferable.

Refinancing to a 15-year mortgage can be a powerful tool for building equity and saving on interest, but it requires a careful evaluation of your financial situation. Consider your ability to handle higher monthly payments, the potential interest rate benefits, your current home equity, the tax implications, and your broader financial goals. Consulting with a mortgage professional can help clarify these factors and determine if a 15-year refinance is right for you.

As always, we encourage you to reach out to us if you have any questions at all.

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