As mortgage rates keep tumbling to new all-time lows, refinancing remains at the top of many homeowners' to-do lists.
If you're thinking about taking out a fresh loan with a lower, money-saving rate, your mind might automatically be going to a 30-year fixed-rate mortgage. It's America's most popular type of home loan, and maybe it's what you already have.
But if you've been in your house a few years, refinancing into a 15-year mortgage can keep you from dragging out the debt and your interest costs. Though the monthly payments can be steeper, the loans come with lower interest rates — currently as low as 1.875%.
Here are four tips on how to get the very best deal when refinancing into a 15-year mortgage.
1. Compare loans
Most mortgage lenders offer both 30- and 15-year terms. Compare the current average rates between the two loan products, then zero in on a couple of lenders and look at the spreads.
If 15-year mortgage rates don't seem substantially lower, it may not seem worth it to accept the stiffer monthly payment that comes with the shorter-term loan.
Still, the long-haul savings can be considerable, especially with rates now at or near all-time lows. You could wind up with a payment very similar to what you have with your current 30-year mortgage, depending on how old it is.
On Monday, rates were averaging 2.82% for a 30-year fixed-rate mortgage and just 2.37% for a 15-year loan, according to Mortgage News Daily. Let's say you're trying to decide whether to refi a $200,000 mortgage balance for either 15 or 30 years, at the average rates.
Your monthly principal and interest payment would be $1,321 with a 15-year mortgage at 2.37%, yet only $824 with a 30-year loan at 2.82%.
But you'd pay total interest of about $38,000 on the shorter-term loan, versus around $97,000 — almost $60,000 more — over the course of the 30-year mortgage.
2. Shop around for a great rate
Fifteen-year mortgages have a few pros and cons.
The primary disadvantage is the plumper payment, which can make it more difficult for you to meet other expenses and can become a huge problem if you lose your job.
The advantages include: a lower interest rate; lower lifetime interest costs; and the ability to pay off the loan and build equity in your home faster.
If you decide to move forward with a refinance into a 15-year mortgage, check rates from multiple lenders in your area and review them side by side to find your best deal.
As you research rates online, you may want to look at the websites of major banks operating where you live. They often have similar pricing on their mortgages, but you might find one offering a cheaper rate or more favorable terms.
Small local banks and credit unions often have affordable rates, but the approval processes can be slower.
3. Make yourself look your best as a borrower
A lender wants to feel confident you'll pay back the loan and not default — particularly at a time when so many people are in a financial squeeze from the pandemic. A very good (740 to 799) or excellent (800 or higher) credit score will help provide that assurance.
If you don't know your credit score you can get a peek at it for free.
If your score could stand improvement, obtain copies of your credit reports from the three major credit reporting bureaus (Equifax, TransUnion and Experian) and make sure they're accurate.
Bad information — such as debts that aren't yours, or debts that are too old and should have fallen off — can weigh down your credit score.
Shore up your score by paying down debt (especially credit card balances), getting bill payments in on time, and not opening new credit accounts while you're shopping for a home loan.
4. Pay as much as you can upfront
If you don't have much equity in your home, making a larger down payment on your refinance loan can help you land an extremely low 15-year mortgage rate for your refi.
You probably want to act fairly fast to get your loan, because 35% of consumers now think mortgage rates will rise over the next 12 months, up from 32% who thought so a month ago, according to a survey from mortgage company Fannie Mae.
Like a decent credit score, a bigger down payment is a way of demonstrating to the lender that you're a good risk and deserve a low rate. If you're heavily invested in your house, it's less likely you'll walk away from your mortgage.
Plus, making a down payment large enough to give you at least 20% equity in your home will keep troublesome private mortgage insurance (PMI) premiums from being tacked onto your house payments.