Getting a 15-year loan increased my mortgage payment. Here's why I did it anyway.
When mortgage refinance rates started to hit record lows this past summer, my husband and I decided it was time to look into a new home loan. There was just one problem, if you want to call it that: We already had a pretty low interest rate on our existing mortgage. This was part of the reason we decided to refinance from a 30-year mortgage to a 15-year loan. And six months later, we're very happy with that decision.
Why we shortened our loan term
As a general rule, you should really only refinance if you can knock your loan's interest rate down by about 1%. The reason? You'll pay what could be hefty closing costs on your new loan, so you'll need to make sure you save enough to cover those fees.
Had my husband and I refinanced to another 30-year loan, we wouldn't have knocked our mortgage rate down all that much. But the shorter your loan term, the lower your interest rate is likely to be. And in our case, refinancing to a 15-year loan did get us to that 1% target.
But that's not the only reason we opted for a 15-year mortgage. We'd already been paying off our loan for eight years. So another factor was that we didn't want to start over with a new 30-year mortgage. We could've gotten a 20-year loan. But there was a big difference in interest rates between the 20- and 15-year mortgage, and we opted for the most savings possible.
Over $80,000 in interest savings overall
Of course, in getting a 15-year loan, our monthly payment did increase by about $300. You may be thinking, "Isn't the point of refinancing to save money?" And you'd be right. We may not save money on a monthly basis, but we do stand to save a ton of money in the course of paying off our home. In fact, we're looking at paying over $80,000 less in interest by knocking out our loan faster.
Also, we spent conservatively on a home in the first place. As such, we have room in our budget to spend an extra $300 a month without having to make major sacrifices. Now to be fair, that's $300 we can't use for other near-term purposes -- investments, vacations, and so forth. But the long-term savings on mortgage interest is worth it.
If you're looking at refinancing your home loan and can afford a higher monthly payment, you might consider swapping a 30- or 20-year loan for a 15-year mortgage. Especially if doing so scores you an ultra-competitive rate on your loan. You may not save money on a monthly basis, but you could still end up enjoying serious savings all in. Besides, there's something to be said for paying off your home sooner rather than later, and a 15-year mortgage makes that possible.
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