Dear Ray,
I have a 30-year mortgage. I’m considering refinancing to a 15-year mortgage while rates are low. The monthly payments will be higher with a 15-year mortgage, and that makes me a little uncomfortable, but I’ll pay off my mortgage in 15 years.
Do you advise your clients to get a 15-year mortgage?
— T.W.
When it comes to advising clients, I tailor my advice to each client. Since every client is unique, my advice will vary depending upon the circumstances.
In your case, I don’t have any information about your age or the balance of your mortgage to recommend a 15-year mortgage over a 30-year mortgage. Although you offer a clue that the higher payments of the 15-year mortgage make you “uncomfortable.” If you feel the higher payment diverts too much of your monthly income to your mortgage payment, then maybe the 15-year mortgage isn’t right for you.
But don’t despair: There are other strategies that can enable you to pay off your mortgage early.
A 15-year mortgage is paid off in half the time of a 30-year mortgage. Suppose you have a $400,000 mortgage at today’s low interest rates. You’ll pay more than $114,000 in interest over 15-years. With a 30-year mortgage, you’ll pay more than $287,000 in interest if you keep the mortgage for the full 30-year term. That’s a savings of $173,000!
Unfortunately, a 15-year mortgage isn’t an option for every homeowner, but there are alternatives to refinancing that will achieve similar results.
Pay-off vs. refinancing
Would you believe me if I told you that you could pay off your 30-year mortgage in 23 years by making one additional payment each year? It’s true. For most mortgages, an additional mortgage payment each year will pay off your 30-year mortgage in 22 to 24 years, saving you six to eight years of interest payments.
If you are unable to make one additional mortgage payment every year, you can divide the payment over 12 months, adding a little extra to each monthly mortgage payment. However, the savings will be less with this method. You’ll realize a greater savings in interest if you reduce the principal with a one-time, full payment once every year.
You can also repay your mortgage faster by paying biweekly. With this method, your monthly mortgage payment is broken into two payments, and you pay half the payment every two weeks, rather than the full payment once a month. You’ll pay off your 30-year mortgage in about 24 years with this method.
Caution: Some lenders do not immediately credit the half-monthly payment unless you’re set up on a plan. (Contact your lender to set up a biweekly payment plan. There may be set-up fees involved.)
If you’re 50 or older, it makes more sense to make additional principal payments on a 30-year mortgage. Keep in mind, many financial advisers will recommend timing the payoff of your mortgage to coincide with your retirement. While you’re working, the mortgage interest is a valuable tax deduction.
In general, if you have a low mortgage interest rate of 7.0 percent or less, you should calculate your monthly mortgage-payment savings weighed against the cost to refinance.
In some cases, it doesn’t pay you to refinance your mortgage. The number of years remaining on your existing mortgage and your age are other factors you need to consider. You may achieve better results with the pre-payment strategies above, saving yourself the expense of refinancing.
Which benefits you more?
Paying off your mortgage early is “in”; refinancing to take money out of your home is “out.” And paying off your mortgage ahead of schedule will save you big money.
I recommend contacting your accountant. He or she can evaluate your circumstances and help you determine if you’ll receive more benefit from refinancing to a 15-year mortgage or restructuring the payments of your current mortgage.
(Note: Pre-paying your mortgage is allowed by most lenders, although some mortgages have restrictions that do not allow pre-payment, including penalties for pre-payment. Before you begin making additional mortgage payments, always consult with your lender.)
RAY AKERS has been a licensed Realtor for more than 25 years and is a lifelong Seattle resident. Send your questions
to ray@akerscargill.com or call (206) 722-4444.
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