Take a deep breath, close your eyes and imagine how it would feel to be mortgage-free in just 15 years. Perhaps you will be filled with an overwhelming sense of relief or excitement at the prospect of the financial freedom paying off your mortgage could provide? As interest rates continue to remain at near record lows, scores of homeowners are recognizing the benefits of refinancing to a shorter-term mortgage. Let’s examine the factors that would make refinancing to a shorter 15-year term loan a smart move.
- Although making the switch from a 30-year fixed rate mortgage to a 15-year fixed rate mortgage will increase your monthly payment, there’s a flipside. Since you will spread the payments over just 15 years instead of 30, you will pay a lot less interest. Furthermore, in most cases, the interest rate for a 15-year loan is less than for a 30-year mortgage. Before taking the plunge into a shorter-term commitment, homeowners should thoroughly research exactly how their financial responsibilities will change.
- For many homeowners, making this decision will lead them to live more frugally and become better at saving money. This phenomenon is likely due to the fact that their goal is perceived as easier to obtain than it was when they were looking at 30 years of house payments. Refinancing to a 15-year mortgage can make the goal of paying it off more quickly seem much more doable.
- Another plus that comes when homeowners pay more each month is the fact that the equity builds up more quickly .
A Real World Success Story
Recently, Kristie Farnham, who is a contributor to Yahoo!Homes, wrote about her family’s experience of refinancing to a 15-year mortgage. Farnham and her husband took out a 30-year mortgage for their Hudson, Wisconsin home in 2011. The mother of three reflected, “We were in our 30s, and it dawned on us that we would most likely have grandchildren before our mortgage was paid off.”
The pair explored the option of making extra payments, and worried that would be a stretch. Next, they began to evaluate the idea of refinancing to a loan with shorter terms. In August of 2012, they chose to refinance. The move had them transitioning from a 30-year 4.25 percent mortgage to a 15-year loan at 3.375
percent. This change increased their monthly payment by over $350.
It has now been one full year since the Farhams refinanced. Here’s a look at why they are still happy about their choice:
- They were able to save substantially on interest. According to Farnham, “Our 30-year loan was for $177,000 at 4.25 percent, which meant we would have been charged more than $136,000 in interest. Our refinanced 15-year loan is for $173,000 at an interest rate of 3.375 percent, which reduces our finance charges to around $48,000. So, while an interest rate differential of .875 percent may not seem like much at first glance, our interest savings as a result of refinancing amounts to over $88,000.”
- As the parents of three children, the Farhams are concerned about saving money for college. Becoming mortgage-free earlier than first planned will provide additional funds for tuition and other expenses.
- The Farnhams also want to save for retirement. They feel that the sooner the mortgage is paid off, even with the expense of college for three children, they will have extra cash for their retirement fund.
- After refinancing last August, the family realized the process would be easier if they became more frugal. They examined all of their spending habits and began to do things differently. For example, they ate out less, shopped at thrift stores, saved on entertainment by renting DVDs, and monitored their utility usage more closely. Farnham observed, “Not only have these minor changes helped us to save money each month, but they also set a good example for our children when it comes to pinching pennies.”
If you are considering refinancing to a 15-year mortgage, be realistic about your finances. You will be paying more each month, so it is vital to realistically evaluate your budget. Although a few lifestyle changes may be in order, won’t being mortgage-free in 15 years make the endeavor extremely worthwhile?
At American Financial Resources, we offer a variety of fixed rate home loan solutions including:
- 30 year mortgages
- 20 year mortgages
- 15 year mortgages
- 10 year mortgages
If you’re interested in learning more about our fixed rate products or have any questions regarding purchasing or refinancing a home, give us a call at 800-634-8616.