Refinancing your mortgage can provide you with a range of benefits. If you manage to score a lower interest rate and aim for a similar term, saving thousands of dollars over the life of your loan could be possible, depending on your existing principle.
The decision to refinance a 15-year mortgage to a 30-year mortgage usually isn’t about financial gain. Typically, 15-year mortgages have better interest rates. Plus, a 30-year mortgage, at a minimum, doubles your repayment term, so you are almost guaranteed to spend more in interest before you pay it off.
However, that doesn’t mean refinancing to a 30-year mortgage is always a bad idea. If you are trying to decide what is right for you, here are some points to consider.
Lower Monthly Payments
When you extend the length of the repayment timeline, your monthly payments are typically lower. For example, if you refinance $200,000 in principle over 30 years with a 4 percent interest rate, your monthly payment would be around $955. That same amount and interest rate on a 15-year loan would have a monthly payment of $1,479. That’s a difference of $524 a month.
Even if the 30-year loan came with a 5 percent interest rate, the payment on a $200,000 mortgage would be $1,074. That’s still $405 less than a 15-year loan for the same amount at 4 percent.
If you are struggling to make the larger payments associated with a 15-year loan, refinancing to a 30-year term could relieve some of the burden. Your monthly payments could be dramatically smaller, suggesting the interest rate you qualify for is similar to your existing 15-year loan.
Higher Total Cost
While your monthly payment on a 30-year loan would be smaller, the total cost is significantly higher. Using the same $200,000 mortgage as an example, having a 15-year loan at 4 percent interest, the total you would pay over the life of the loan is $266,288.
In comparison, a 30-year loan with the same interest rate runs $343,739 over the life of the loan. You’d pay $77,451 more using this approach than sticking with a 15-year mortgage.
A 30-year loan with the 5 percent interest rate is even worse, costing you $386,510 over the life of the mortgage. That means this 30-year loan costs you $120,222 more in the end, suggesting you stick to the original payment schedule.
There may be other factors that impact how much refinancing could benefit you. For example, if your current loan has PMI, but you now have at least 20 percent in equity, a refinance could allow you to rid yourself of that extra cost. This applies whether you refinance into a new 15- or 30-year loan.
If your current 15-year mortgage monthly payments are only unaffordable because of PMI, refinancing into a new 15-year loan could allow you to experience a reduced payment without the drawbacks of an extended term, suggesting you can get the same interest rate.
Additionally, if you are in a 15-year adjustable rate mortgage, refinancing could allow you to get a fixed interest rate instead. While switching to a fixed rate means you wouldn’t automatically benefit if interest rates fall, it also keeps your interest rate from climbing. This approach provides a level of stability that makes it easier to budget for your payment. You know exactly what you need to pay and when which is often better for budgeting.
When to Refinance a 15-Year Mortgage to a 30-Year Mortgage
Ultimately, whether refinancing into a longer term is a smart move depends on your unique situation. In most cases, refinancing to a 30-year mortgage means a lower monthly payment but practically guarantees that you will pay more in interest over the life of your loan.
However, if you choose a mortgage that does not come with a prepayment penalty, you can offset some of the difference if your financial situation improves. For example, you can make extra payments toward the principle when you have the opportunity, reducing the amount of interest you’ll pay over the remainder of the loan.
Similarly, if freeing up some money each month means you can avoid or pay down credit card debt (which usually comes with much higher interest rates compared to mortgages), you might come out financially ahead overall. This could apply even if refinancing into a 30-year mortgage means having to take on a higher interest rate than you had with your 15-year loan, suggesting that the new mortgage interest rate is lower than what you have on your credit cards.
Deciding When to Refinance Your Mortgage
If you are trying to decide, take a look at your entire financial picture first and foremost. Examine all of your current interest rates and determine if you could pay off high-interest debt faster if your refinance. It may also be wise to craft two versions of your budget, one reflecting your current situation and one based on your possible mortgage payment if you refinance, to give you a better idea of how your financial life would compare.
In the end, the choice is yours. But, by using that approach, you can better assess the pros and cons based on your unique situation.
Have you ever refinanced a 15-year mortgage to a 30-mortgage? What about the other way around? Tell us why in the comments below.
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