One of the rare good things you can say about 2020 is that the lowest mortgage rates of all time have given US homeowners huge savings through refinancing.
Is there another refi on your to-do list, something you hope to check in early 2021? If you have a home, have a thirty year mortgage and can benefit from refinancing, it is natural if you are first trying to incur a thirty year loan.
You reduce your monthly payment, possibly by hundreds of dollars, and give your budget some breathing space during this time of economic stress.
But there are good reasons to consider refinancing after a 15-year mortgage loan. Rates on fixed and 30-year fixed mortgage rates are at or near record lows, according to the latest weekly survey by mortgage firm Freddie Mac.
Personal finance personality Suze Orman says it is wise to take out a 15-year loan. “Do not refinance and extend your years,” she said. People in a recent interview.
However, other experts say it is not a smart idea to shorten your loan term – especially not during the COVID crisis.
Look at the arguments on both sides to help you decide if a 30-year or 15-year refinance is the right choice for you.
Benefits of refinancing after another thirty-year mortgage loan
It is estimated that 19.4 million Americans can refinance with a 30-year mortgage loan and save an average of $ 308 a month, mortgage lending firm Black Knight recently said.
These refi candidates sit on loans with interest rates that are at least three-quarters of 1 percentage point (0.75) higher than the current interest rates at fixed interest rates for thirty years, which is a record of average. 2.67% in Freddie Mac’s recording. This is just slightly higher than the recent record low of 2.66%.
“Borrowing costs have never been cheaper for homeowners,” says Grant Moon, founder and CEO of real estate technology company Home Captain.
At the beginning of 2020, the typical rate for a 30-year loan was 3.72%.
Fifteen years of fixed interest rates are still lower than 30 years of loans. The rates on the short-term loans are now the lowest average ever 2.17%.
But Moon says it is better in the current environment to opt for a thirty-year mortgage loan for refinancing, because loans for 15 years are paid much more monthly.
“Your pay is likely to rise, and with uncertainty surrounding the economy with millions of people receiving unemployment benefits, it could be a dangerous proposition if a borrower loses his job and gets stuck with a higher payment amount,” he says.
A fixed interest rate of $ 250,000 and 30 years at 2.67% has a monthly payment of $ 1,010. The same size mortgage for 15 years at 2.17% has a much steeper monthly payment: approx. $ 1 628.
Benefits of refinancing a 15-year mortgage loan
For borrowers who can afford the higher payments, the 15-year refinancing has mortgage benefits, says Richard Pisnoy, a principal at Silver Fin Capital, a mortgage broker in Great Neck, New York.
“They will not only pay a lower interest rate on the loan, but they will also reduce the number of years on the loan, which saves a huge amount of interest,” says Pisnoy.
With the 15-year mortgage loan in the previous example – amounting to $ 250,000 and at 2.17% interest – the interest cost would be approx. $ 43,100 over the life of the loan.
The 30-year mortgage loan in the same amount at 2.67% interest will have much higher lifetime interest costs: more than $ 113 600.
Suze Orman says the interest burden should be considered for a hypothetical homeowner who has been paying on a fixed interest rate loan of thirty years for 14 years.
“Now you decide to refinance and you take out a fresh 30 year mortgage loan,” she writes on her blog. “Of course, the new mortgage has a lower interest rate, but you only extended your mortgage on this house to 44 years! That’s 44 years of interest payments.”
How to make your choice
But Moon, of the captain of the house, doubts whether many homeowners are sitting on a mortgage loan of more than a decade.
“The U.S. refinancing boom began in May last year, and many of those who were eligible to refinance – or it made sense to do so – have already refinanced,” he says.
If you refinance after a new loan of thirty years, your monthly mortgage costs will decrease. If you refinance after a 15-year mortgage, your long-term costs will decrease. Your decision ultimately comes down to how confident you are in your current financial situation.
Although 15 years of mortgage lending has financial benefits, it can be risky, Pisnoy says.
“The borrower needs to understand what the effect of a larger monthly payment will be on their cash flow, and any financial impact it will have on them if they lose any monthly income they currently have,” he says.
If you refinance in a 15-year home loan and the monthly payments become too much, you can not just start sending 30-year payments to your loan caregiver. It will not fly.
If you probably still have a 30 year mortgage and the lower monthly installments, this may be the smartest step if you are unlikely to stay home longer. If you are going to move out in a few years, what does it matter if you have a loan of 30 or 15 years?
Whichever mortgage term you choose, make sure you have enough home insurance. Get rates from various insurers and compare rates, to make sure you get the right homeowner coverage at the best price.