Current mortgage interest rates on fixed-rate loans have eased compared with recent highs. According to the latest Mortgage News Daily rate survey, the average rate on a 30-year fixed-rate mortgage is about 6.07%, while the average rate on a 15-year fixed-rate mortgage is around 5.58%. These figures reflect daily national averages reported by lenders. Although these rates remain above the historic lows seen in previous years, refinancing to a shorter-term mortgage can still save you tens of thousands of dollars over the life of your loan, provided your budget allows for higher monthly payments.
The Burden of Mortgage Interest
When you pay your monthly mortgage bill, much of your payment goes toward interest. During the earlier years of your mortgage, most of your payment goes to interest rather than principal.
Interest is a fundamental part of the mortgage lending industry. It is how lenders earn revenue and manage risk when lending large sums of money to homeowners.
However, mortgage interest can be a significant financial burden. For instance, if you have a $200,000 fixed-rate 30-year mortgage at a rate near current averages, you will pay a substantial amount in interest if you take the full 30 years to pay off the loan.
Now consider refinancing that same loan into a 15-year term at a lower rate. Over the 15-year repayment period, you would pay significantly less in interest. That represents a large savings in interest payments over the life of the loan.
The Challenge
The higher monthly payment is the main challenge of switching to a 15-year fixed-rate mortgage. A shorter payback period significantly increases monthly costs. For example:
- A 30-year fixed-rate loan of $200,000 at a rate near current averages would have a monthly payment that is substantially lower than
- A 15-year fixed-rate loan of $200,000 at a lower rate, which would have a noticeably higher monthly payment.
This difference of several hundred dollars per month, or several thousand more per year, can make a 15-year mortgage unaffordable for many borrowers, even though it offers significant interest savings.
Lower Interest Rates Change the Equation
When mortgage rates are lower, the financial trade-offs of refinancing shift. For instance, refinancing from a longer-term fixed-rate loan at a higher rate to a shorter-term fixed-rate loan at a lower rate might result in a manageable increase in monthly payments, depending on your household budget.
Refinancing to a shorter term means you can save tens of thousands of dollars in interest while paying off your loan faster. However, even with lower rates, ensuring the new monthly payment fits within your financial means is essential.
Example Scenario
Take a $200,000 loan as an example:
- On a 30-year fixed-rate mortgage with a rate near recent averages, the total interest paid would be large, while the monthly payment would be substantially lower.
- Refinancing that same loan to a 15-year fixed-rate mortgage with a lower rate would result in a much smaller total interest payment, with a monthly payment that is noticeably higher.
While the monthly payment increases, the long-term savings in interest can make the switch worthwhile for those who can afford the higher payments.
Is Refinancing Right for You?
Refinancing to a shorter-term mortgage may be a sound financial strategy if:
- You have a stable income. The higher monthly payment will not strain your budget.
- You qualify for competitive interest rates. A strong credit score and steady financial history improve your refinancing options.
- You plan to stay in your home long term. Refinancing makes sense if you plan to stay in your home for several years to recoup closing costs and benefit from interest savings.
If you are unsure whether refinancing is right for you, consult a financial advisor or mortgage professional. They can help assess your household budget and determine whether refinancing aligns with your financial goals.
Final Thoughts
Mortgage interest can be a significant expense over the life of your loan. Refinancing to a shorter-term mortgage allows you to reduce this cost significantly while building equity faster.
However, this option requires careful planning to ensure the higher monthly payment fits comfortably within your budget. By reviewing the numbers and consulting with professionals, you can decide whether refinancing into a 15-year mortgage is right for you.