Refinancing to a 30-year vs. 15-year mortgage
Frugality is in these days, and that has many homeowners looking for a refinance deal to cut housing costs. When shopping around for a home refinance, it is important to compare not only interest rates but the different types of loans available. Refinancing to a 30-year term could lower your monthly payments, but a 15-year loan could allow you to pay off your home sooner.
Stable monthly mortgage payments
A 30-year fixed-rate mortgage is a bastion of stability. It offers a fixed interest rate and payments over the life of the loan. For some borrowers stability is good, but having a mortgage for three decades is not. For those individuals, a 15-year mortgage with fixed interest and payments may be a better option.
If you are like many people, getting a 15-year mortgage may seem daunting if you're unsure about future income. A 15-year mortgage requires a larger monthly payment than a 30-year loan, so a bigger chunk of your income would go toward principal and interest each month--and don't forget to factor in tax and insurance payments. Borrowers who want to pay their loans off faster but don't want obligation of a higher payment may plan to refinance with a 30-year mortgage and then pay as though they have a 15-year loan.
Budgeting for mortgage costs
It is important, however, to ask yourself whether you would really follow through with making the larger payments each month. To evaluate this plan, set up a monthly budget that accounts for all your income and expenses. A budget gives you a realistic idea of whether the larger mortgage payments are likely to occur. If you don't have the income to support larger monthly payments or have a lot of other debt, stick with the 30-year payment schedule until you are able to afford putting extra income toward paying down principal.
15-year refinance deals are popular
More borrowers are choosing 15-year mortgages because interest rates are so low. In late May 2011, 15-year mortgage rates averaged 4.16 percent and 30-year mortgages averaged 4.9 percent, according to HSH.com. But according to a Washington Post article, some mortgage lenders were offering fixed rates under 3 percent for refinancing if borrowers were willing to lower their term to seven years and have payments automatically withdrawn from bank accounts.
It won't be easy to score such a deal. You'll likely have a tough time qualifying for the best mortgage rates without an excellent credit score above 740 and a strong appraisal on your home. You'll also probably need to have at least 25 percent equity in your property.
Find a knowledgeable mortgage lender to talk with to become more informed about the types of mortgages for which you might qualify. Expect to undergo tough scrutiny of your finances before being approved for a mortgage refinance.
