One of the rare good things you can say about 2020 is that this year's lowest mortgage rates of all time have offered U.S. homeowners massive savings through refinances.
Eager borrowers have been submitting refinance applications at nearly double the rate of a year ago, the Mortgage Bankers Association reported on Wednesday.
If you own a home, have a 30-year mortgage and could benefit from refinancing, it's natural if your first thought is to pull the trigger on another 30-year loan.
You'll shrink your monthly payment, possibly by hundreds of dollars, and give your budget some breathing room during this time of economic stress.
But there are good reasons to consider refinancing to a 15-year mortgage instead. It happens that both 30- and 15-year fixed mortgage rates have hit record lows, according to the latest weekly survey from mortgage company Freddie Mac.
Personal finance personality Suze Orman says it's wiser to refi into a 15-year loan. "Do not refinance and extend your years," she said earlier this year, in an interview with People.
Yet other experts say shortening your loan term may not be a smart idea — especially not during the current crisis.
See the arguments on both sides to help you decide if a 30-year or 15-year refinance is the right pick for you.
Advantages of refinancing to another 30-year mortgage
An estimated 19.3 million Americans with 30-year mortgages could refinance right now and save an average $299 a month, the mortgage data firm Black Knight recently said.
These refi candidates are sitting on loans with rates at least three-quarters of 1 percentage point (0.75) higher than current rates on 30-year fixed-rate mortgages, which are averaging a record 2.80% in Freddie Mac's survey.
"The cost to borrow has never been cheaper for homeowners," says Grant Moon, the founder and CEO of the real estate technology company Home Captain.
At the start of 2020, the typical rate for a 30-year loan was 3.72%.
Fifteen-year fixed-rate mortgages come with even lower rates than 30-year loans. Rates on the shorter-term loans are now at a lowest-ever average of just 2.33%.
But Moon says you're better off choosing a 30-year mortgage for a refinance in the current environment, because 15-year loans come with much stiffer monthly payments.
"Your payment would likely go up, and with uncertainty around the economy with 23 million people receiving unemployment benefits, it could be a dangerous proposition if a borrower were to lose their job and be stuck with a higher payment amount," he says.
A $250,000, 30-year fixed-rate mortgage at 2.80% has a monthly payment of $1,027. The same size mortgage for 15 years at 2.33% has a much steeper monthly payment: about $1,647.
Advantages of refinancing to a 15-year mortgage
For borrowers who can manage the higher payments, 15-year mortgage refinances have benefits, says Richard Pisnoy, a principal with Silver Fin Capital, a mortgage broker in Great Neck, New York.
"Not only will they be paying a lower interest rate on the loan, but they will reduce the number of years on the loan, thus saving an enormous amount of interest," Pisnoy says.
With the 15-year mortgage in the earlier example — in the amount of $250,000 and at 2.33% interest — the interest costs would be around $46,500 over the life of the loan.
The 30-year mortgage in the same amount at 2.80% interest would have far higher lifetime interest costs: nearly $120,000.
Suze Orman says consider the interest burden for a hypothetical homeowner who has already been paying on a 30-year fixed-rate mortgage for 14 years.
"Now you decide to refinance and you take out a fresh 30-year mortgage," she writes, on her blog. "Sure, the new mortgage is at a lower interest rate, but you just extended your mortgage payment on this home to 44 years! That’s 44 years of interest payments."
How to make your choice
But Moon, of Home Captain, doubts many homeowners are sitting on mortgages more than a decade old.
"The U.S. refinance boom started last May, and many of those who have been eligible to refinance — or it made sense for them to do that — have already refinanced," he says.
Refinancing to a new 30-year loan would chop down your monthly mortgage costs. Refinancing to a 15-year mortgage would reduce your long-term costs. Your decision ultimately comes down to how confident you feel about your current financial situation.
Though 15-year mortgages have financial benefits, they can be risky, Pisnoy says.
"The borrower needs to understand what the impact of a larger monthly payment will do to their cash flow and any financial impact this will have on them should they lose any monthly income they currently have," he says.
If you refinance into a 15-year home loan and the monthly payments become too much, you can't just start sending your loan servicer 30-year-size payments. That won't fly.
Going with another 30-year mortgage and its lower monthly payments can be the smarter move if you're not likely to stay in the house for the long haul. If you may be moving out within a few years, what does it matter whether you have a 30- or a 15-year loan?
Regardless which mortgage term you choose, make certain you have enough home insurance. Get quotes from multiple insurers and compare the rates, to be certain you have the right homeowner coverage at the best price.