Does Refinancing Your Home Make Sense

Refinancing from a longer term loan into a 15-year loan is a common way of taking advantage of today's low interest rates. If you know you’re going to stay in your home for a long period of time, refinancing to a 15-year loan may be the option for you because you’ll be paying down the mortgage faster and saving money on interest over the duration of the mortgage.

One big misconception people have with refinancing to a 15-year loan is their payment will double. While you are cutting the term of the loan in half, you don’t exactly double your payments. Some of that has to do with the way the money compounds and some of it has to do with the idea that when you have a shorter-term loan, you’ll pay less in interest.

Assume you have a $200,000 mortgage. If you chose a 30-year loan at 4%, your monthly payment would be $954.83. Over the life of the loan, you’d pay $143,739.01 in interest. Now, compare that scenario with someone refinancing to a 15-year loan after 5 years. The loan amount after 5 years would be $181,245.70, the interest rate would be 2.875%, and your monthly payment would be $1,240.78, or roughly $286.00 more than your 30-year payment. But look at the loan term total numbers: You’d pay $80,279.95 over the life of the loan in interest.

As an added bonus, you’d build up a large amount of equity faster and save more than $60,000 over the life of the loan. Of course, whenever you refinance, you’ll need to consider the steps and expect to spend at least 2.5 percent of your new loan in closing costs. The fees are for processing your loan paperwork, checking your credit, appraisal fees, title search fees, etc.

If you can afford the upfront costs and the higher monthly payments, refinancing your mortgage with a 15-year home loan could make a lot of sense.