Nick Pakulla - Mortgage Lender Loan Officer in MD, DC, VA

Should I refinance to a 15 year mortgage? A number of borrowers who have the equity and cashflow are making the switch and refinancing to 15 year mortgages.  15 year mortgages are amortized over 15 years instead of 30 years, so the payment is slightly higher but the loan is paid off much sooner.  Also 15 year mortgage rates are much better than their 30 year counterparts.

The benefits to refinancing to a 15 year mortgage: If you are buying your "final" home in your mid 30's would it be great to know you'd be done with your mortgage payment when you turn 50!? Rates are about 0.5% to 0.75% better.  Ie: if 30 year rates are around 4.25-4.5% you can expect 15 year to be between 3.5-4% On a $300,000 30 years mortgage at 4.5% you will end up paying $247,000 in mortgage interest.  On a 15 year at 3.75% you would pay only $93,000 in mortgage interest.  That is a difference of $154,000!

There are a few caveats to the numbers above that are worth consideration:

1. On the $300,000 mortgage your monthly principal and interest payment on 15 years would be $2182 as compared to $1520 on a 30 year. 
   
   
2. If you made the equivalent $2182 payment per month on the 30 year mortgage at 4.5% your mortgage would be paid off in 16 years and 2 months, but with a total interest cost of $123,000.  In this scenario the actual savings of the 15 year is $123,000 - $93,000 = $30,000!
   
   
3. Financial advisors would argue that you can earn a rate of return higher than 4.5% and putting more money into your home vs. investing it may not ultimately be the wisest choice.  (Realizing those gains requires a disciplined investment strategy)

Bottom line, there is something great to knowing that your mortgage payment will be done in 15 years, plus you pay down principal much faster.  If you are disciplined and think that investing your money would yield greater returns a 30 year may be your best choice.  Happy refinancing!  Please feel free to call me or drop me an email if you have any questions, 301.585.7283.  I can also connect you with a qualified financial advisor to help guide you with your specific situation.