Why Consider Refinancing to a 15-year Mortgage?

In my experience as a CPA, I’ve seen how refinancing can significantly benefit homeowners. One option I often discuss with clients is refinancing to a 15-year mortgage. While this typically results in higher monthly payments, it can also offer substantial advantages, such as significant interest savings and faster equity building. Let’s explore the compelling reasons why refinancing to a 15-year mortgage might be a strategic choice for you.

Simply put, it means swapping your current mortgage for a new one that you’ll pay off in 15 years instead of a longer period, like 30 years. This means you’ll own your home outright sooner. While your monthly payments will likely be higher, you’ll usually get a lower interest rate and save money on interest over the life of the loan. It’s a popular choice to consider for homeowners who want to build equity faster and become mortgage-free quicker.

Refinancing to a 15-year mortgage offers a compelling route to financial freedom and stability. Let’s take a look at the key benefits.

Even if the interest rate on a 15-year mortgage is slightly higher than your current 30-year loan, you’ll pay significantly less interest over the life of the loan. That can translate to substantial savings, potentially amounting to tens of thousands of dollars. Why? Because you’re paying off your mortgage faster.

With a 15-year mortgage, a larger portion of your monthly payment goes toward the principal balance, allowing you to build equity more quickly. This can be a major advantage if you plan to sell your home in the future or want to access your equity for other financial goals.

Imagine being mortgage-free in half the time! A 15-year mortgage allows you to achieve this dream, providing financial security and the freedom to allocate funds towards other priorities like retirement or investments.

15-year mortgages typically come with lower interest rates than their 30-year counterparts. That’s because lenders view them as less risky due to the shorter repayment period. That further contributes to your overall interest savings.

With a fixed-rate 15-year mortgage, your monthly payments remain consistent, making budgeting a breeze and providing financial stability.

In some cases, if interest rates have dropped significantly since you took out your original mortgage, refinancing to a 15-year term could actually lower your monthly payments.

As you build equity faster with a 15-year mortgage, you gain access to valuable financial resources. You can tap into this equity through a home equity loan, a home equity line of credit (HELOC), or a Cash-Out Refinance, providing funds for home improvements, debt consolidation, or other needs.

While a 15-year mortgage offers multiple benefits, it’s important to consider the impact of inflation. Inflation gradually decreases the value of money over time. This means that, with a 30-year mortgage, your fixed monthly payments become “easier” to afford over the years. Why? Because the dollars you’re paying are worth less than they were when you first took out the loan.

This opens up another possibility. You could potentially invest the difference between a 15-year and 30-year mortgage payment and earn a higher return than the interest you’re saving on the shorter-term loan. It’s a trade-off worth considering!

While the benefits of refinancing to a 15-year mortgage are enticing, it’s essential to consider the potential downsides before making a decision.

The most significant drawback is the increase in your monthly mortgage payment. Since you’re paying off the loan in half the time, your payments will be noticeably higher. This could strain your budget and limit your financial flexibility for other expenses.

With a larger chunk of your income going towards your mortgage, you might have less available for other financial goals, like saving for retirement, investing, or handling unexpected costs.

Remember those closing costs? They can range from 2% to 6% of the loan amount and can eat into your potential savings, especially if you don’t plan to stay in your home long enough to recoup them.

Choosing a 15-year mortgage with its higher monthly payments might limit your ability to invest in other areas with potentially higher returns, such as stocks or retirement accounts.

Carefully weigh these potential drawbacks against the advantages of refinancing to a 15-year mortgage. Consider your financial situation, long-term goals, and risk tolerance before making a decision.

Before you jump into refinancing to a 15-year mortgage, it’s important to understand the eligibility requirements. Lenders typically look for the following:

• Good Credit Score: A credit score of 620 or higher is generally required, but some lenders may have stricter standards.
• Low Debt-to-Income Ratio (DTI): Your DTI, which compares your monthly debt payments to your gross monthly income, should ideally be below 43%. A lower debt-to-income ratio shows lenders you can comfortably handle the higher mortgage payments.
• Sufficient Equity in Your Home: You’ll typically need at least 20% equity in your home to qualify. This means you owe no more than 80% of your home’s current market value.
• Stable Income: Lenders want to see proof of steady income to ensure you can afford the increased monthly payments.
• Mortgage Seasoning: There’s often a waiting period after your initial mortgage before you can refinance, known as “seasoning.” This varies depending on the lender and loan type.

To improve your chances of qualifying for a 15-year refinance, focus on improving your credit score, lowering your DTI, and building equity in your home.

Refinancing your mortgage can have tax implications, especially if you’re doing a Cash-Out Refinance. Here’s a quick overview:

• Mortgage Interest Deduction: You can usually deduct the interest you pay on your mortgage if you itemize your deductions. However, there are limits on how much you can deduct.
• Points Deduction: If you paid points to lower your interest rate, you can typically deduct those over the life of your loan.
• Cash-Out Refinance: If you use the cash from a Cash-Out Refinance for home improvements, the interest on that portion might be deductible. But if you use it for other things, it generally isn’t.

Tax rules can be tricky. It’s always best to talk to a tax pro to understand the specific tax implications of refinancing your mortgage. They can help you make sure you’re maximizing your deductions and minimizing your tax liability.

Refinancing to a 15-year mortgage can be a fantastic way to save on interest, build equity faster, and own your home sooner. But it’s not a one-size-fits-all solution.

Consider your budget and whether you can comfortably afford the higher monthly payments. Think about your goals. Do you prioritize stability and faster debt payoff or maximize investment opportunities? And what about your risk tolerance? Are you comfortable with potentially higher returns from investments, or do you prefer the security of a fixed-rate mortgage?

By carefully weighing these factors and understanding the tax implications of refinancing, you can make an informed decision that aligns with your long-term financial goals.

If you’re ready to explore your options, DSLD Mortgage is here to help. Contact us today to discuss your refinancing needs and find the best solution for your unique situation.

1. Investopedia: The Pros and Cons of a 15-Year Mortgage — February 16, 2025
2. Bankrate: Should You Refinance To A 15-Year Mortgage? — October 31, 2024
3. The Mortgage Reports: How does refinancing affect your taxes? — January 13, 2022.