Should I Refinance to a 15-year Mortgage?

Middle-aged man and woman work at a laptop to figure out their mortgage paymentsWith mortgage rates holding and a booming economy, lots of homeowners are rushing to refinance their mortgages to lock in low rates. One increasingly popular option is to refinance a conventional 30-year mortgage into a 15-year loan.

Borrowers may be wondering if this is a financially sound move to make for their own home loan.

We’ve researched this option and worked out the numbers so you can make a responsible, informed choice about your own mortgage.

When refinancing can be a good idea
The primary attraction to a shorter mortgage term is paying off your home loan sooner, typically at a lower interest rate. This can help you increase your home equity faster and can mean paying thousands of dollars less in interest over the life of the loan. Therefore, refinancing to a shorter-term loan makes the most sense when interest rates are falling.
It’s also a particularly good idea for homeowners who can easily afford to increase their existing monthly mortgage payments. In addition, homeowners whose home values have increased since they financed their original mortgage will be more likely to qualify for a 15-year loan, since they will have a lower loan-to-value ratio —how their home’s current value compares with their current loan balance.

How much money can I save?
There is no quick answer to this question, as there are several variables at play in each refinance. To provide a basic idea of what a shorter-term home loan can mean for your finances, let’s take a look at how the numbers would work out in a 15-year refinance on a conventional home loan.

As mentioned, a 15-year loan generally carries a lower interest rate than a 30-year loan. If national interest rates are falling when you refinance, and/or your credit has improved since you bought your home, your interest rate can be even lower. According to Bankrate’s most recent survey of the nation’s largest mortgage lenders, on Dec. 6, 2019, the benchmark 30-year fixed mortgage rate was 3.74 percent and the average 15-year fixed mortgage rate was 3.16 percent.

Let’s assume you refinance your fixed $300,000 mortgage with an interest rate of 4.5 percent to a 15-year loan at an interest rate of 3.5 percent.

If you kept your existing mortgage unchanged for 30 years, you’d be making 360 payments over the life of the loan at $1,520.06 a month, not including taxes, insurance and other fees.

Toward the beginning of the loan, an overwhelming majority of your monthly payment will go toward interest, with less than $400 going toward your principal. By the time you pay off your loan, this ratio will reverse itself and the majority of your payments will go toward the principal of the loan. Most importantly, over the life of your loan, you will have paid $247,220.13 in interest.

Now let’s explore what these payments would look like if you refinanced this loan to a 15-year fixed-rate loan at a 3.5 percent interest rate.

Over 15 years, you would make 180 payments of $2,144.65. Over the life of the loan, you’d be paying $86,036.57 in interest payments, bringing significant savings of $161,183.56. You’d also be chipping away at your principal at a far quicker pace, with $1,269.65 of your very first payment going toward the principal of the loan.

If these numbers are exciting you about getting your refinance process started, take a step back and slow down. First, these numbers may or may not translate directly to your own situation. In the above example, savings are calculated over 30 years, but you may be nearing the halfway point of your 30-year mortgage. A refinance can still be a good idea if it can get you a lower rate for the remainder of your loan, but your interest savings will be significantly less than those described above. Second, your interest rate may not be a full point lower after a refinance, as it is in our example. This, too, will afford you less savings.

There are other crucial factors to consider before jumping into a 15-year refinance. Read on for a review of some of the more important variables to think about when making this decision.

What will a refinance cost?
Refinancing your mortgage is not cost-free. Expect to pay a minimum of 2.5 percent of your new loan in closing costs and other fees.

Here are some of the possible fees you can expect during the refinance process:

  • A fee for pulling your credit
  • A fee for processing your paperwork
  • Lawyer fees
  • An inspection fee
  • Discount points, each of which are equal to one percent of your home loan, which will give you a lower mortgage rate
  • An appraisal fee
  • A surveyor fee
  • Title search fee
  • Title insurance

Before you get started on the refinance process, it’s a good idea to tally up these expenses and see how much it would cost you to refinance.

You might be offered the option of refinance at no cost. This means your closing costs will be rolled into your new mortgage payments. This can make financial sense if it means saving money in the long term, but it’s a good idea to work out the numbers before you continue with the process.

Finally, your existing mortgage may have prepayment penalties, which can cut into the amount you’ll save by refinancing. Find out about these fees before you set the refinance process in motion.

When refinancing to a 15-year mortgage is not a good idea
If you’re convinced that a 15-year refinance is right for you, make sure to consider this crucial factor before going ahead with the refinance: Your monthly mortgage payments will increase significantly after a 15-year refinance. In the example above, the mortgage payments increased by $624.59 a month. Your own payments may see a similar change, and any increase will impact your finances.

If you’re financially responsible, you won’t consider this move unless you are confident you can afford to meet this increased mortgage payment. However, you may not realize that tying up your spare cash in your home’s equity can be a risky move. It can make more financial sense to first build an emergency fund with 3-6 months’ worth of living expenses, and to increase your retirement contributions. If you’re carrying any high-interest debt, you’ll want to pay that down, too, before moving ahead with a refinance.
Increasing your monthly mortgage payments can mean leaving you with a tighter monthly budget and very little breathing room. Make sure you are fully prepared to swallow these costs before you go ahead with a refinance.

Are you ready to make the move to a shorter-term loan? Speak to a representative at Advantage One Credit Union today to learn about our fantastic home loan options.

Your Turn:
Have you refinanced to a 15-year mortgage? Tell us about it in the comments.

Learn More:
.bankrate.com
money.com
mybanktracker.com
themortgagereports

All You Need To Know About Home Loans

Close-up of a mortgage application on a desk with a pen and keys on top of the applicationHere at Advantage One Credit Union, we provide a variety of products and services to meet your specific financial needs and in the most ideal ways possible. One such example is our home loans. Let’s take a closer look at this product and how its application process works.

What is a home loan?
A home loan, or a mortgage, enables you to purchase a home without having to foot all the cash out of your pocket when purchasing. You will, however, need to make a down payment, which is typically between 3.5-20% of the home’s appraised value, along with closing costs and some other fees. The lender then finances the rest of the purchase. You’ll repay the loan, along with interest, over the course of (generally) 15 to 30 years.

Are all home loans alike?
Before you get started, you’ll need to choose a mortgage type. A conventional loan will necessitate a 5-20% down payment on the home. There’s also an FHA loan, which only requires a down payment of 3.5%, but necessitates mortgage insurance. If you’re a military veteran, consider obtaining a VA loan, which lets you buy a home with zero down payment.

Once you’ve chosen the kind of loan which is best for your scenario, you may be given a choice of repayment arrangements for that loan. Here are the three common types of mortgages:

  • 30-year fixed-rate mortgage
    The interest rate on this 30-year mortgage will remain fixed no matter the changes to the national rate.
  • 15-year fixed-rate mortgage
    This mortgage will also have a fixed interest rate, but the term lasts just 15 years. The monthly payments will be higher, but the overall interest paid over the course of the loan will be significantly lower.
  • Adjustable-rate mortgage (ARM)
    An ARM gives the borrower a lower interest rate in the early years of the loan, and then a gradual increase (adjustment) in rate over the rest of the life of the mortgage.

What do I need to know before applying for a home loan?
A home is likely to be the largest purchase you will ever make. To qualify for one, you will need to prove that you are living a financially responsible life and that you can afford the monthly payments.

The primary way lenders gauge your financial responsibility is through your credit score. This number is like a grade that tells lenders how you’ve handled your past credit card accounts and other debts. It will include the length of time you’ve had your credit cards and loans open, the timeliness with which you’ve made your payments, the trajectory of your debt and the amount of available credit you might use. Most lenders will only grant a home loan to borrowers with a credit score of 650 or higher. You can check your score for free on Credit Karma. You might also consider ordering a free credit report from all three major credit bureaus once a year at AnnualCreditReport.com.

During the time leading to your mortgage applications, make sure to pay all your bills on time, don’t open new credit cards and work on paying down overall debt. A higher credit score will help you get approved quicker and it will net you a lower interest rate on your loan.

Another crucial factor in determining your eligibility for a mortgage is your debt-to-income ratio, or your DTI. Lenders want to know how big your collective outstanding debt will be in relation to your income if you receive the home loan. Most lenders will only allow a maximum DTI of 36%. Here at Advantage One Credit Union, we allow our members to take out a home loan with a DTI of [XX%].

When should I apply for a home loan?
While you won’t need the loan until you are ready to close on a house, it’s a good idea to start the process before you begin house-hunting. Your lender will let you know whether you can expect to be approved for a loan and will provide you with an estimate of how much house you can afford so you don’t face disappointment later.
When initially applying for a home loan, ask your lender for a letter of pre-approval. This letter confirms you are pre-approved for a home loan up to a specific amount. Having this letter in hand shows real estate agents and sellers that you are serious about buying. Most pre-approvals are only good for 60-90 days, so make sure you’re ready to start house hunting before you get yours.

How do I apply for a home loan?
To apply for a home loan at Advantage One Credit Union, stop by and ask a representative to help you get started. Make sure all of your financial paperwork is in order and hold onto all important financial documents in the months leading up to your application.

To make it easier, we’ve created a list of the information and documents you’ll need:

  • Name of current employer, phone and street address
  • Length of time at current employer
  • Official position/title
  • Salary including overtime, bonuses or commissions
  • Two years’ worth of W-2s
  • Profit & loss statement if self-employed
  • Pensions and Social Security check stubs
  • Proof of child support payments
  • Copies of alimony checks
  • Statements for all checking and savings accounts
  • Investments (stocks, bonds, retirement accounts)
  • Proof of any gifted funds from relatives
  • Car loan information

You will also need to explain any blemishes on your financial record; including bankruptcies, collections, foreclosures and delinquencies.

If you’re ready to apply for a home loan, stop by Advantage One Credit Union today. We’re completely committed to your financial success.

Your Turn:
How did you prepare for a home loan application? Share your tips with us in the comments.

Learn More:
thebalance.com
rubyhome.com
thelendersnetwork.com

Mortgage Rates Are Dropping; Should I Refinance?

a young couple refinances their house at the credit unionQ: I’ve heard that mortgage rates have dropped dramatically since the start of 2019. Should I refinance my mortgage loan to take advantage of these lower rates?

A: Refinancing a mortgage is essentially paying off the remaining balance on an existing home loan and then taking out a new mortgage loan, often at a lower interest rate. It may sound like a no-brainer, but there are many factors to consider before moving forward with a refinance.

Is it a good time to refinance?
Mortgage rates have been falling steadily over the last few months. During the last week of March this year, rates took their biggest one-week nosedive in more than a decade, and mortgage applications rose 39%, as thousands of homeowners sought out their lenders for a refinance.

However, the downward trend has already reversed as of the beginning of April, when rates hit 4.29%. That’s up from 4.17% just one week prior. If you’re thinking of refinancing in the near future, it’s best to do move quickly so you can lock in the lowest possible rate. You may be able to save hundreds of dollars a month if you refinance a loan that currently has a relatively high interest rate.

Is a refinance right for you?
While this is definitely an excellent time to take out a new mortgage, that doesn’t mean a refinance is the right fit for everyone.

Here are two reasons a refinance might be a good fit for you:

  • Your credit is strong and you’d like to lower your monthly payments
    The first, and most obvious, reason homeowners refinance their mortgage is to take advantage of a lower interest rate. The drive behind this reason might be a change in finances, personal life or simply the desire to save money. As mentioned, the current mortgage rates make this an excellent time to refinance into a lower interest rate.

    Don’t try a refinance unless your credit is in good shape, though. Taking out another mortgage with a less-than-desirable credit score can mean getting hit with a high interest rate, even if national rates are dropping.

    Aside from reducing your monthly payments, a lower interest rate can also help you build more equity in your home sooner.

  • You’d like to shorten the life of your loan.
    People sometimes choose to refinance their mortgage because they want to finish paying off their loan sooner. If you have a mortgage that has a really high interest rate but you can easily meet these payments, consider refinancing into a shorter-term option. You may be able to pay off your loan in half the time without changing your monthly payment much at all

When refinancing your mortgage is a bad idea
In the following three circumstances, refinancing your mortgage may not make sense.

  • You’re in debt.
    If you’re looking for the extra stash of cash each month to pull you out of debt, you probably shouldn’t be refinancing. Most people who refinance for this reason end up spending all the money they save, and then some. Without making any real changes to your spending habits, giving yourself extra money is only enabling more debt. While the intention is rooted in sound logic, unless you make an equally sound change in your spending habits, you’ll be right back to your present situation in very little time.
  • A refinance will greatly lengthen the loan’s terms.
    If you’ve only got 10 years left on your mortgage and you want to refinance to stretch out those payments over 30 years, you won’t come out ahead. Any money you save on lower payments will be lost in the cost of the refinance and the extra 20 years of interest you’ll be paying on your mortgage.
  • You don’t plan on living in your home much longer.
    If you plan on moving within the next few years, the money you save might not even come close to the costs of a refinance.

How much will it cost?
Homeowners are often eager to get started on a refinance until they see what it will cost them.

Remember all those fees and closing costs you paid when you first bought your house? Prepare to pay most of them again. Broker fees will vary, but a typical refinance will cost anywhere between 3-6% of the loan’s principal.

Before proceeding with your refinance, make sure you’ll actually be saving money. You can do this by procuring a good faith estimate from several lenders. This will get you your projected interest rate and the anticipated loan price. Next, divide this price by the amount you’ll save each month with your anticipated new rate. This will give you the number of months that will have to pass before you break even on the new loan. If you don’t plan on staying in your home for that long, or you can’t afford to wait until then to recoup your losses, refinancing may not make sense for you.

Rates are still low, and if your finances are in good shape, a refinance can be a great way to put an extra few hundred dollars into your pocket each month. [If you’re ready to talk to a home loan expert about refinancing, call, click or stop by Advantage One today to ask about getting started on your refinance. We’re always happy to help you save money!]

Your Turn:
Have you refinanced? What drove your decision? Was it the right decision for you? Let us know in the comments!

SOURCES:

https://www.myfinance.com/5-reasons-to-refinance/?utm_source=Millennial+Money&utm_campaign=millennialmoneycru&utm_medium=mfCRU

https://www.consumersadvocate.org/mortgage-refinance/a/best-mortgage-refinance?matchtype=e&keyword=should%20i%20refinance&adpos=1t2&gclid=CjwKCAjww6XXBRByEiwAM-ZUILOeJrx3aTigcckJXeQcxYZ5KC-gPj1HDcbQYQlprrg3zX08LqGaohoCL14QAvD_BwE

https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/

https://www.investopedia.com/mortgage/refinance/7-bad-reasons-to-refinance-mortgage/

https://www.bankrate.com/mortgages/analysis/

https://www.wkbn.com/news/local-news/with-mortgage-rate-drop-many-buyers-consider-refinancing/1897961701