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Should you refinance from a 30 to 15 year mortgage? The answer might seem obvious. Why not take a lower rate and pay off your mortgage faster? But hold up a second. There's more to the equation that you should consider. Here, we'll talk about the factors to consider, and we'll look at examples of potential savings.

Mortgage rates are rising again. But they’re still pretty low historically. And rates on a 15-year mortgage are even lower than rates on a 30-year mortgage. Freddie Mac’s average 30-year mortgage rate for October 2017 was 3.90%. But you could get a 15-year mortgage for 3.20% or even less (see current interest rates here).

The spread doesn’t seem like a lot. But with the lower interest rate and a shorter repayment term, you’ll pay much less interest over time. Still, that’s not the only factor to consider when deciding whether to refinance from a 30-year to a 15-year mortgage. Here are other things to keep in mind:

Your Payment Will Go Up

Even if you can significantly reduce your interest rate with a 15-year note, your monthly payment will likely go up. Let’s say you have a $250,000 30-year mortgage at a 4% APR. Your monthly payment, excluding taxes and insurance, should be about $1,193 per month.

Now what happens if you refinance to a 15-year mortgage at 3.3% interest? You’ll wind up with a $1,762 per month payment. That’s a $569 difference each month!

Now, that additional payment may be worthwhile. After all, you’ll pay off your mortgage in half the time without nearly doubling your monthly payments.

But before you take the leap, consider what that increased mortgage payment may do to your budget and investing opportunities, including:

  • Reducing flexibility in your budget. If your budget is at all tight, moving up in mortgage payments may not make sense. Sure, you’ll pay off your home faster. But for the next 15 years, you may struggle to just pay the mortgage each month. That’s not a good way to live or obtain financial freedom.
  • Reducing your ability to pay off other debts. If you’re still working towards debt freedom, what will an increased mortgage payment do to this? It may be better to put that $569 towards high-interest credit card debt. Once you’ve cleared these obligations, then consider refinancing to a shorter mortgage term.
  • Reducing your ability to invest. What if you’re in a great financial position, with more income than you need and no high-interest debt? Even then, refinancing may not be the best option. If you’re a steady saver and good investor, you can probably get a higher return on that $569 per month than the few percentage points you’ll save. This doesn’t always work out, of course, but it’s something to consider (here’s our guide on how to invest).

How Much Interest Will You Save

With all that said, looking at the overall savings for this refinance scenario may sway you to take the financial leap. You can run your numbers through this loan calculator to find out exactly how much interest you’ll pay in either situation.

For an example, let’s look at the hypothetical loan situation above. The first loan is a $250,000 30-year loan at 4% interest. On this loan, the total interest paid would be $179,673. That’s a huge amount of money!

But if you convert it to a 15-year loan at 3.3% interest, you’ll only pay $67,295 in interest over that 15 years. That’s a savings of $112,378. Not exactly pocket change!

Lowering the rate and the repayment term can save you serious cash over the life of your loan. And that’s what makes it seem like refinancing from a 30-year to a 15-year mortgage is a no-brainer.

But don’t start shopping for a 15-year mortgage just yet. Read on to find out how taxes may mess with your calculations.

Learn More: Get a free quote on a 15-year mortgage from LendingTree

What About Taxes?

Before you make your refinancing decision, be sure to take taxes into account. If you don’t itemize your tax deductions, this won’t matter much. And depending on the way the planned future tax reform goes, it may become a moot point.

But for now, when you itemize as a homeowner, you’ll usually get a tax deduction equal to your marginal tax rate times the mortgage interest you pay. Be sure to include any state tax income you pay in your marginal tax rate.

Let’s say your marginal tax rate is 30%. Remember we said the difference in total interest paid between our hypothetical mortgages is $112,378? If you take taxes into account, the real difference is more like $78,664 ($112,378 – (1-.3)).

That’s still a lot of money, of course. But it’s less than it seems like at first blush.

So at this point, it looks like we’ve muddied the waters more than actually answered your question. So let’s talk through some specific situations where refinancing may or may not be the best route.

Some Examples

Scenario 1: Your Mortgage Interest Rate is High

What if you still haven’t taken advantage of the relatively low interest rates of the last decade or so? In this case, it may make sense to refinance to a shorter-term loan as soon as possible. In fact, you may even wind up with a much smaller payment!

This may also be the case if you’ve only been a homeowner for a few years but first obtained your mortgage with less than stellar credit. If your increased credit score qualifies you for a lower rate, shop around. You may find a 15-year mortgage has a payment equal to or below what you’re currently paying on your 30-year mortgage. This can be the case if you are significantly dropping your interest rates.

So if you’re currently in a 30-year mortgage with an above-average rate, you should definitely shop around to refinance. And you may even find you can get into a shorter term without laying out much more cash each month.

Scenario 2: You’d Rather Invest

What if you want to invest in something other than your home? As long as you’re paying a relatively low mortgage interest rate, that can be a viable option.

Let’s say you scope out the above refinance, but decide not to do it. Instead, you steadily invest that $569 per month for the life of your existing 30-year mortgage. If you earn an estimated annual interest rate of 8%, you could have $848,014 in the bank by the time your mortgage is paid off. (That doesn’t, of course, take taxes into account. So be sure you do that math.)

What if, instead, you decide to take the higher payment and get out of your mortgage in 15 years? In this case, you decide to just invest the whole $1,762 mortgage payment for 15 years after your mortgage is paid off. That might seem better because you’re investing more money, right?

However, when you’re dealing with compound interest, time is a huge factor. So in this case, earning 8% interest, you’ll only wind up with $609,719. If you’re consistent with your investments, you could come out on top. Of course, the market will play into these considerations, and you could lose money rather than more quickly building equity in your home.

Scenario 3: You’re Not a Disciplined Saver

What if you have extra money in your budget, but you’re prone to spending it rather than saving beyond the minimum? In this case, a 15-year mortgage could be a good choice. It’s a sort of forced savings. Maybe you’re not getting a great return on your investment. But it’s better than frittering away that $569 per month, for sure.

Just be sure that you really do have the wiggle room in your budget, and the steady income, to comfortably make the increased mortgage payments. Otherwise a small financial bump in the road could cause serious financial repercussions.

As with all things personal finance, the decision of whether or not to refinance from a 30-year to a 15-year mortgage is just that: personal. Just make sure you look at the actual math rather than jumping to conclusions about the best option.

Author Bio

Total Articles: 1080
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

Grant says:

I did refinance from 30 years loan to 15 years loan. In my case, the payment only went up by 100 dollars. How is that possible, you asked? I bought the house in 2007, which was right before when the housing market went into the twilight zone. In 2007, I got 7% for 30 years and I refinanced it last year to 2.75% for 15 years. What is amazing is that I only knocked off $1,000 from principle when I was paying the 30 years loan. I knocked off $9,000 in one year with the 15 years loan. WOW!!!

I made the switch to for two reasons. One is to build up the equity as I plan to move. Second is to try to pay off the house before my kids go to college. That way I can help pay their way through college.

Great job Grant. Most people don’t realize how much interest and how little principle they are paying on a 30 year mortgage. Keep it up, you’ll have that mortgage dead before you know it.

Rob Berger says:

Grant, that’s a win-win. Thanks for sharing your experience.

Maggie says:

We refinanced nearly 2 years ago from a 30 to a 15– $265k loan at 4.5%. At that time, we rolled our 2nd mortgage into the loan (its rate was 6.75, 15 years). Just trying to tackle the overall debt. The higher payment was workable, as we are blessed with two steady jobs. Pulled the trigger again this week and refi’d the 15 to a 2.75 rate. Payment decreased by $500/month due to the much lower balance as a result of paying down the principle much faster on the 15y. Yes, our term is starting over, but my hope is to accelerate payments (keep them the same) which will make it 10y 8m remaing…. shortening our actual term under the previous 15y by about a year and a half. Would love to have no mortgage payment by the time we retire…. the ultimate goal.

Rob Berger says:

Maggie, it sounds like you’re on your way to being mortgage-free! It’s just that interest rate that is tempting me right now. I just don’t know if I can talk my wife into a third refi in less than a year!

Home Buyer says:

I, too, refinanced my first FHA 30-year mortgage with 3.6% interest into a 15-year at 3.3% eliminating the MIP and keeping my payments nearly identical. Six months later when interest rates dropped more, I refinanced AGAIN into a new 15-year mortgage at 3.0% interest. With both refinances, I still paid the original monthly (higher) amount to knock down the mortgage even quicker. Between the interest savings, the removal of the MIP and the additional principal payments monthly, I expect to have the house paid off in 11 years!!!

Money Beagle says:

The most important thing that I think people don’t understand is that while your payment goes up, what goes up even more is your equity in your home. If your payment goes up by $150 a month, that’s $150 more in cash you have to pay, but you could be paying $400 more in principle a month. So that $150 is getting you a ‘bonus’ net worth boost of $250 per month. That’s huge and adds up big over the life of the mortgage.

David S says:

We refinanced our 2 year old 30 FHA 4.5% mortgage into a 15 year conventional 2.5% mortgage and the total payment stayed the same. The reason was that the slight increase in the P&I was offset by the removal of MIP that was part of the FHA loan. So instead of paying the mortgage insurance it goes towards our principle.
The reason for the refinance though is that we want to be out of all debt ASAP and the mortgage is the last of our debts to tackle. Also the retiring of the mortgage will coincide with our eldest entering college so we will be able to provide a “scholarship” for him to get his higher education.

Rob Berger says:

David, I wish every visitor to this site would read your comment. It’s an excellent plan. And for those wondering about MIP, it’s mortgage insurance required on FHA loans. You can get some idea of it here.

Jordan says:

To save that much interest definitely seems to be a good idea. We can afford the extra few hundred to save thousands over time. I never thought of refinancing to a 15 year mortgage but now I’ll look into it.

dusty rhodes says:

On the surface, paying off a mortgage by a 15 year loan as opposed to a 30 year
loan seems very wise given the conventional wisdom that says one ought to pay
off a mortgage as soon as one possibly can. The question I would pose is do we
tyically give any thought to how useless dead equity in a paid off home really is.
Yes it is nice to be without a payment. Natural disasters such as mud slides which
have taken people’s homes in California or hurricanes which have taken peoples
homes along the eastern seaboard, or earthquakes which have damaged peoples
homes beyond repair, which in many cases have resulted in a total loss because
hazard insurance didn’t cover many or most of these situations, in hindsight didn’t
turn out to be a very wise move. It is possible today to purchase rental homes
at a discount of from 15-40% today because of the mortgage mess of recent years.
Would it not be more prudent to take significant equity out of a home, buy two
discounted homes, and make 3 times the annual principal savings by just re-
financing a principal residence. Many people today are increasing net worth
exponentially by parlaying what they could use to pay down a principal mortgage,
whatever the vehicle, and instead using an equity outside for more profitable
investments. Different baskets spreads out one’s risk and if appreciation ever
comes roaring back the result could be phenomenal.

Tom says:

You can take the extra money that your have per moth after the mortgage is paid off and put it into whatever investment you want! I don’t think I have ever heard of someone complaining that their house was paid off and they felt like they wish that they didn’t do it. I recall my mother having a mortgage burning party about 20 years ago….

tafffy says:

Hi, I have a 30 year mortgage with 256 months of payment left at an interest of 4%. I’m thinking of doing a refi which will cost me $3500 in closing costs. The interest rate would be 3%..My payment will be about $290 more a month but for 15 years vs. 30 years. Is this a wise decision?