Refinance into a 15 year loan instead of 30

With historically low interest rates many homeowners are refinancing their mortgages. If you are considering a refinance there are many reasons to consider a 15 year fixed instead of the 30 year fixed that most people opt for.  Part of my strong belief in home ownership comes from a personal desire to have my home paid for and what a powerful thing that can be.

Refinancing into a shorter loan is not just about paying your mortgage off faster though.  Banks price mortgages based on how risky they are; the longer the loan, the higher the risk of default. The shorter the loan term, the lower the interest rate is.

1. Pay your home off faster.  The fact is, if you are ever in a position to pay off your mortgage, you nearly eliminate housing expenses, something that never happens when you rent. By definition, a 15-year mortgage positions you to own your home free and clear in half the time (of course, taxes and insurance don’t go away).

2. Free yourself from the market cycles. On a 30-year mortgage, nearly the first half of the loan is amortized in a way that you’re primarily paying interest, so very little equity is being built up. As a result, many 30-year mortgage borrowers look to market appreciation as the only increase in equity they can count on during the first half of the life of their loan. After the last few years we all know that market appreciation simply isn’t something we can rely on.

With a 15-year loan, you pay your principal off more quickly. As a result, you build equity up consistently and without relying on the market to increase the value of your home.

3. Save tens, even hundreds of thousands of dollars.  According to the National Association of Realtors, the median sales price for all existing American homes in August 2010 was $178,600. Finance that for 30 years at 4.375%, and you’ll pay $140,338 in interest over the 30 years. Elect for a 15-year mortgage at 3.75% instead? You’ll pay only $55,187 in interest over the life of the loan — 60% less interest, a savings of over $85,000!

A fifteen year loan is definitely something to consider if your equity position and monthly income allows.  For me it is a wonderful thing to consider that my home would be ‘free & clear’ in such a relatively short time.