Q: I'm ten years into paying off a 30-year mortgage. I want to refinance, but I feel like I'm stuck in the middle. I haven't quite gotten to the 15-year mark, but if I refinance to another 30-year mortgage I'll feel like I'm just starting the whole thing over again. At what point does it make sense to refinance to a shorter mortgage?
A: There are three important elements to determine mortgage loan refinance timing:
- Rate comparison. If your mortgage is about ten years old, you might save substantially on interest no matter which mortgage term you choose. Thirty-year mortgage rates were nearly three full percentage points lower in the winter of 2017 than the winter of 2007. However, 15-year rates are cheaper still - recently they were about 70 basis points lower than 30-year rates. The wider the spread between 15 and 30-year loan rates, the more incentive there can be to go with a shorter loan.
- Monthly payment affordability. A shorter loan term compresses the repayment period, resulting in higher monthly payments than a longer loan. However, since you are already 10 years into your 30-year mortgage, you might not find the shift to a 15-year loan all that drastic. In fact, the impact on monthly payments of the shorter term might be completely offset by the lower interest rate.
- Your current balance. Mortgages have become more straightforward since the housing crisis, but ten years ago you may have gotten a mortgage with low principal payments in the initial years. The more you have left to repay, the more burdensome a switch to a shorter mortgage may be.
Finally, while 15 and 30-year mortgages are the most common, depending on your lender you might be able to get a loan for a term that more precisely meets your needs. However, if you can swing the monthly payments, switching to a shorter repayment period is generally the best way to minimize your interest expense going forward.