Can I Refinance from a 30-Year Mortgage to a 15-Year Mortgage?
30-Year to 15-Year Mortgage Refinancing
When it comes to getting a mortgage refinanced, you generally have plenty of options. Do you want an FHA or a conventional? Would you prefer a cash out refinance or do you just want to get a change in your terms? Do you want fries with that?
One of the more common questions people have when they’re considering a refinance is if they can magically change their 30 year mortgage into a 15. And the answer, from pretty much every banker ever, is a resounding yes -- with some qualifiers.
Back to the Drawing Board: Qualifying for a 15-Year Mortgage
When you request a 15 year mortgage refinance, the lenders you’re working with jump for joy. Your risk to them has just been reduced significantly. That’s 15 years of payments they suddenly don’t have to worry about. This is all good stuff. But, just to be fair, they have to qualify you just like they would for a 30 year mortgage. That’s where the wheels fall off these things sometimes.
All the qualification guidelines are basically the same as for a 30 year, including your debt to income ratio, even though it will calculate out to be significantly higher because of the shortened term. That’s because, while you may get a lower rate, your payment is significantly larger overall. Let’s do some math! (Don’t run away!)
If your original mortgage was for $300,000 using a 30 year conventional at 4.75 percent, your monthly principal and interest payment would be $1,565. You managed to pay your mortgage down to $275,000, let’s say, and the new rate will be 4.125 percent on a 15 year mortgage. That payment is $2,051. There’s a chart below for the more visual learners among us.
Now, instead of your debt to income having to be within ratios for that $1,500 payment, your income has to support a $2,000 payment. And maybe it can. But if you’re even close to the line already, you may not be able to qualify, regardless of the fact that theoretically swapping into a 15 year mortgage is totally doable.
Now, the Bigger Question: Should You Refinance a 30-Year Mortgage to a 15-Year Mortgage?
Refinancing into a 15 year mortgage is kind of a big deal. It can have some really significant benefits for people who are financially positioned just so, but it can also set you up for a massive fall if anything were to go wrong. Before you fix your mind on a 15 year mortgage, ask yourself these questions and, please, be honest.
How tight will my budget be with the payment on a 15 year note? If it’s going to be a squeeze, see if your current mortgage has a prepayment penalty. If it doesn’t, just pay extra every month instead of raising your minimum to a point that leaves you no breathing room. That way if you can’t make the extra payment one month, you don’t have to.
Is my field and income secure and stable? Of course, the bank wants to know this, too. But you may have a better idea if your industry is in decline and so forth. If you can’t keep an income that will support the higher payment, you need to keep your minimum as low as possible.
Is there a smarter place I could be putting that $500 a month? Even with all the talk of raising interest rates, mortgage rates are incredibly low. That extra money you’re pouring into your mortgage could be making you a bundle on internet stocks or Bitcoin or maybe Etsy…?
Am I taking the mortgage interest deduction on my taxes? This is a little out in left field, but if you’re taking the mortgage interest deduction, you’re going to miss out on a lot of years of that. If it doesn’t make that much difference to your tax liability, then no sweat. Consult your tax advisor for more information.
Refinancing your home loan into a 15 year mortgage means that you’re going to be raising your minimum payment, so if you’re unsure even a little bit, why not take it for a test drive, see how it handles. If your budget can easily absorb the additional money you’re putting toward the mortgage, by all means look into a refinance. If it feels a bit too tight, then you dodged a mighty large bullet there.
To Do the 15-Year Refinance or Not?
You don't have to decide between the two -- you can split the difference. There are also 20 year mortgages, which are something like in-between options for borrowers. They’re not as common, so you don’t always see banks offering them, but they’re around. Everything written above about 15 year mortgages applies to the 20 year, except the bump in your payment is less and you’ll pay a little more interest over the lifetime of the loan.
If you want to talk more about shortening your loan term by refinancing into a quality mortgage product, just contact us here at Home.Loans. We’d love to help! We’ve been having office chair drag races all afternoon and we’re kinda amped up.