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Refinancing into a 15-year mortgage from a 30-year mortgage can be a great way to save money. You’ll pay a lower interest rate for fewer years and own your home sooner.
However, you’ll pay closing costs to take out the new loan, plus your new monthly payment will probably be higher, giving you less financial flexibility.
Here’s what you should know about refinancing to a 15-year mortgage:
- What happens when you refinance to a 15-year mortgage?
- How much you could save on interest by refinancing to a 15-year mortgages
- Benefits of a 15-year mortgage
- Drawbacks of a 15-year mortgage
- Who should switch to a 15-year mortgage?
What happens when you refinance to a 15-year mortgage?
When you refinance a mortgage, you’ll get a new home loan and use it to pay off your current mortgage. Then, you make payments on the new mortgage instead. Your interest rate and monthly payment should change after refinancing.
According to the most recent mortgage refinance statistics from Freddie Mac, 75% of homeowners with a 30-year fixed-rate mortgage refinanced into the same type of loan, while 16% refinanced into a 15-year mortgage. Among homeowners with a 15-year mortgage, 70% refinanced into the same loan type.
Find Out: How to Refinance Your Mortgage in 6 Easy Steps
How much you could save on interest by refinancing to a 15-year mortgage
If you refinance from a 30-year mortgage to a 15-year mortgage, your new monthly payment will most likely be higher, but the total interest you’ll pay over the life of the loan will be lower. You’ll also own your home outright sooner.
Let’s say you’re four years into your 30-year mortgage, and you now want to refinance to a new 15-year mortgage. Your current balance is $231,724. Rates are low, and you manage to secure a great APR, dropping down from 4.15% to 2.20%.
While this will raise your monthly payment by about $300, you’ll stand to save over $106,000 in interest with the new loan.
Here’s a breakdown of how much in interest you could save in this scenario by refinancing into a 15-year loan:
| Original 30-year mortgage (26 years left) | New 15-year mortgage | |
|---|---|---|
| Current balance | $231,724 | $231,724 |
| APR | 4.15% | 2.20% |
| Monthly payment | $1,215 | $1,513 |
| Total interest over life of loan | $187,493 | $40,544 |
| Interest paid so far | $40,057 | $40,057 |
| Interest remaining | $147,436 | $40,544 |
| Total interest savings | None | $106,892 |
Even after paying $4,600 in closing costs to get the new loan — about 2% of the loan amount — you’ll come out way ahead in this example. Your breakeven period would be $4,600 divided by $300, or just over 15 months. So by month 16 of your new loan, you’d be coming out ahead.
The choice to refinance won’t always be so clear cut, and refinancing into a shorter loan term isn’t right for everyone. But it’s worth at least doing the math to see what you could save.
Credible can help you compare refinance rates from all of our partner lenders — you can start and finish the whole process on our platform, and it only takes a few minutes.
Benefits of a 15-year mortgage
The main appeal of switching to a 15-year loan is saving money on interest and owning your home free and clear sooner. Let’s look at the benefits in a bit more detail.
Saving on interest
You’ll often pay less interest over the life of a 15-year mortgage than a 30-year mortgage. That’s because — on top of the shorter loan term — interest rates on 15-year loans tend to be lower than those on 30-year loans.
Paying off your mortgage faster
This one is a no-brainer. Having a 15-year mortgage forces you to pay off your mortgage twice as fast as a 30-year mortgage.
When you no longer have a mortgage payment, you can put all that money toward other things, like retirement savings or investments. Plus, owning your home debt-free can feel great.
Building equity quickly
With a lower interest rate and shorter loan term, you’ll build home equity much more quickly.
In the table below, you can see how much more in principal (and less in interest) you’d pay on a 15-year loan. The example assumes a $200,000 mortgage balance at 2.73% APR for the 30-year loan and 2.19% APR for the 15-year loan.
| Loan term | First payment | Principal | Interest | Loan balance |
| 30-year | $814.37 | $359.37 | $455.00 | $199,640.33 |
| 15-year | $1,304.59 | $939.59 | $365.99 | $199,060.41 |
Refinancing might make the most sense for your situation. If you’re ready to refinance your mortgage, let Credible help.
We make the refinance process easy — in just a few minutes, you can compare all of our partner lenders and get prequalified refinance rates without leaving our platform.
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Checking rates will not affect your credit
Drawbacks of a 15-year mortgage
Refinancing into a 15-year mortgage often means taking on a larger monthly payment, so you’ll have less cash available each month.
Higher monthly payments
Switching from a 30-year mortgage to a 15-year mortgage often — but not always — means your monthly payment will be higher. It depends on how much you still owe on your current mortgage and the rate difference between your current loan and your new loan.
You may not pay it off in 15 years, but you’ll still save on interest, and you’ll retain your current financial flexibility.
Less financial flexibility
If refinancing into a 15-year mortgage does give you higher monthly payments, you won’t have as much financial flexibility.
Examine your current cash flow, and decide if there are places where you can cut back to help pay off your home faster. Reducing discretionary spending can be a smart financial move.
On the other hand, ignoring high-interest credit card debt or your emergency savings could end up costing you more than you save.
If things like traveling and eating out are a big part of your life, you need to take that into consideration before refinancing into a shorter-term loan.
Closing costs
Closing costs are an important factor in any refinance decision. Closing costs usually amount to 2% to 5% of the loan amount.
To get a new mortgage, you’ll have to pay closing costs in one of three ways:
- In cash at closing
- Roll them into the new mortgage (also known as a no-closing-cost refinance)
- Have the lender pay them, and pay a higher interest rate on your new mortgage instead
The sooner the breakeven point, the better, and you’ll need to stay in your home beyond that point to come out ahead from refinancing.
It’s up to you what an acceptable breakeven point is, but a good rule of thumb is two to three years. The median age of a refinanced loan is 4.2 years.
Who should switch to a 15-year mortgage?
In an ultra-low interest-rate environment, the type of homeowner who would most benefit from switching to a 15-year loan is one who:
- Prioritizes debt-free homeownership over saving and investing (or has enough cash flow to do both)
- Can comfortably make the higher monthly payments without sacrificing other financial goals
- Plans on staying put for four years or longer (or at least long enough to break even)
- Can lower their interest rate by at least 0.75%
Learn More: When to Refinance a Mortgage: Is Now a Good Time?
