When refinancing into a 15-year mortgage makes sense
you’re on a fixed income. That extra money you’ll be spending could earn a greater rate of return invested elsewhere. You’ll also have less ability to deduct mortgage interest paid on your taxes.
Yet if you have sufficient cash flow, this strategy can be advantageous, despite the higher monthly payment. Good candidates include homeowners who have lived in their home for several years and have a monthly budget and income that will enable the higher payment while also allowing wiggle room for other expenses, including repairs, maintenance and emergencies. Having extra money set aside for the unexpected is particularly important during the current economic downturn.
Before refinancing into a 15-year mortgage, shop around carefully and compare current mortgage refinance rates from different lenders.
Paul Buege, president/ COO of Pewaukee, Wisconsin-based Inlanta Mortgage, notes that your monthly payment may not necessarily increase when moving from a 30-year to a 15-year mortgage loan.
“You may actually be able to reduce your monthly payment, depending on the size of your current mortgage and how much lower the new rate is compared to your current mortgage rate,” says Buege. cash flow. That’s especially true in the uncertain financial climate we’re currently in. You have to make sure you can continue to make payments or you could risk losing your house,” cautions William Stack, a financial adviser with
Stack Financial Services LLC in Salem, Missouri.
Instead of refinancing a mortgage, you could contribute more money toward a 401(k) plan or an IRA account or beef up your emergency savings fund. The latter approach helps you avoid revolving credit card balances from month to month and incurring more debt at a higher interest rate.
“I believe that if you’re not maxing out any available employer match to your retirement plan, it’s a mistake to accelerate your mortgage payments by shifting to a 15-year mortgage,” says Allison Bishop, CPA, a financial coach in
Portland, Maine. “You’re giving up a 100% return on your investment in favor of something more like a 3 to 4% return. It’s also smarter to put that extra money toward paying down higher-interest credit card debt if you have it.”
Glenn Brunker, mortgage executive at Charlotte, North Carolinaheadquartered Ally Home, says worthy prospects for shifting to a 15-year loan should meet specific criteria.
“The best candidate is a homeowner who determines that, after reviewing their overall finances, they can comfortably afford the higher monthly payments associated with a 15-year loan,” explains Brunker.
Ask Shea Adair, a Raleigh, N.C.-based real estate agent and investor and he’ll suggest staying put for at least seven years after refinancing so that you can recoup your closing costs.
“I would also only recommend refinancing if you can lower your interest rate by at least 1% (100 basis points),” Adair says.
Robert Taylor, owner of The Real Estate Solutions Guy in Sacramento, California, a real estate investment company, says homeowners who have less than 18 years remaining on their 30-year mortgage are probably better off making extra payments toward principal over the next few years if they want to pay off their loan sooner.
“But if your current home loan has 18 or more years of payments left, or has an interest rate of 4% or higher, it might be worth refinancing into a shorter 15-year loan,” says Taylor.