Should you refinance into 15-year mortgage?

With the pandemic still prevalent and interest rates near all-time lows, now is a great time to think about a refinance. It also may be an opportune time to consider shortening your mortgage's term in the process.

Refinancing from a 30-year, fixed-rate mortgage into a 15-year fixed loan can result in paying down your loan sooner and saving lots of dollars otherwise spent on interest. You'll own your home outright and be free of mortgage debt much sooner t han normal. Plus, mortgages with shorter terms often charge lower interest rates. Consequently, more of your monthly payments will be applied to the loan's principal balance.

But a 15-year mortgage isn't for everyone. Before refinancing, shop around carefully and compare current mortgage refinance rates from different lenders.

Advantages

Rajeh Saadeh, a real estate attorney, professor and investor in Somerville, New Jersey, says the benefits of refinancing to a 15-year loan are plentiful.

“Lenders often charge a lower interest rate for a 15- year mortgage than a 30-year mortgage. In addition to lowering your interest rate, you will create a more aggressive paydown schedule, which can save you thousands in interest in the long run,” he says. “Also, you'll build equity more quickly, which you'll be able to tap via a future home equity loan, home equity line of credit or cash-out refinance if you need extra money.”

Paul Buege, president and COO of Pewaukee, Wisconsinbased 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,” Buege says.

Drawbacks

Having all your money tied up in your home can be risky. Many financial experts recommend having at least three to six months of emergency savings set aside in case you lose your job or cannot work for extended periods.

“You may not want to refinance if it will negatively impact your monthly 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 car db alances from month to month and incurring more debt at a higher interest rate.

Questions to ask

• Can you afford the higher monthly payment?

•Is them oneyyouul timately save worth the higher payment every month, keeping in mind other goals you may have for the money?

•Will refinancing and paying more each month deplete your savings and emergency funds?

• Instead of making higher monthly payments, could you invest the extra money and earn a higher rate of return than the mortgage interest rate you'll pay?

• Do you have other outstanding higher-interest debt ( including credit card debt) that you should pay down first?

• Do you plan to remain in your home for several years after refinancing so that you can at least recoup what you paid in refinance closing costs?

• How many years remain on your current home loan? If it's less than 18 years, is refinancing to a new 15-year loan worth it?

• How secure is your job? What would happen if you became unemployed or earned less in the future?

•Is it smarter and easier to simply make accelerated payments on your current mortgage?

•How much longer will you be eligible to deduct your mortgage interest paid if you refinance to a 15-year loan?