General Question

syz's avatar

What's involved in swiching my mortgage to a 15 year?

Asked by syz (35846points) December 11th, 2007

I have a pretty good mortgage rate but I HATE the thought of spending so much money on interest over the life of the loan. I’ve been told that the payments don’t change that dramatically if I get a 15 year mortgage. What’s involved? Is it a basic refinance? Are there costs involved?

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6 Answers

glial's avatar

Every consider just making extra payments?

kevbo's avatar

Normally (I suppose), it is a basic refinance and there are costs involved. The costs are frequently rolled into the principal balance and paid off over the life of the loan. The move is frequently a good deal for folks who bought at a higher rate and can move into a lower rate, which many did a few years ago. You’d have to run the numbers yourself (rates & calculators are available online) to see what you can get. I would expect a minimum $100/month increase.

Extra payments, as glial mentioned, will also pay it down faster. If you put less than 20–22% down when you purchased, then you’re also paying mortgage insurance (to protect the lender if you default). You’ll probably want to make eliminating that felonious charge a priority. Check with your lender to see what the requirements are for that.

robmandu's avatar

I’ve heard recently that a basic fixed-rate 15 year mortgage can be handled by any bank anywhere in the country… because they’re so simple to setup and maintain. That would likely mean that you’d have the option to shop around a bit to get the best possible rate.

That said, the cost of refinancing can be significant… and unless you’re looking at a relatively significant drop in rate, it might simply be best to make additional principal payments instead. Depending on where you are in the life of your mortgage, the additional principal payment could be quite low.

And with that said, if you do elect to make additional principal-only payments on your mortgage, be sure to send that in as a SEPARATE check… with the words “PRINCIPAL ONLY PAYMENT” in the memo… so that the bank doesn’t confuse it with a regular payment in advance.

ironhiway's avatar

glial’s sugestion of extra payments is probably the best choice.

Since rates have gone up you may actually pay more in addition to the fees incurred in the refinance. Plus if for some reason you need the extra part of the payment for an unexpected you can use it for that.

All you have to do to figure the extra payment is go to or other site that has a mortgage calculator and enter your principle and interest and the time you want to have it paid off to get your result.

You may also want to consider other options real estate loans offer the best interest a consumer is going to get. If another investment offers you a better return than your payout you would then be better off funneling the extra part of the payment into that and letting your home loan add to your income. As the investment grows you’ll find that you could pay off your home loan even sooner.

Or you may want to consider funding more into your retirement accounts once again comparing the cost versus return.

allengreen's avatar

If it is an FHA mtg you can do a “STreamline” or a “Float down” or a “rate and term” refi. On an fha loan, it will cost virtually nothing, with no appraisal.

Only an industry insider will give you this option since it does not pay the lender or broker to do. Must have equity at least 10%, and this may work on a VA loan too.

jpeterson's avatar

We really need to know your approx. balance/rate & whether you’re currently paying MIP or PMI (two forms of mortgage insurance) to really help you.

If your current rate was 5% & 15 year rates are 5%, you don’t benefit anything by refinancing due to the costs. You’d be better to make extra payments. Find a calculator online, put in your balance, rate & 15 years; it will spit out the appropriate P&I payment you should make. Compare that to your current P&I amount on your bill. Add the difference to your monthly payment & make sure they apply it to the principal. In rare cases, some servicing companies may play games with the extra payment and apply it to future payments or toward your taxes/insurance if you have those impounded.

If the current rates are lower, you need to weigh the cost vs. the benefit.

If you could get ¼–½% lower or more on a no cost loan, really any improvement on a rate with no cost would make sense. You would just have to decide if it was worth your time/trouble. I’ve seen people scoff at the idea of refinancing when they can save $200/mo. on their payments and some that jump up and down if they can save $30/mo.

Generally, the higher your balance, the less the rate needs to drop to make the refinance option better. Saving ½% on a $600K loan cuts the interest almost $3000 the first year….so if fees were $3–4K; this would make sense. Saving 2% on a $50K loan would save you less than $1k/ interest the first year…so if the cost is $3–4k it’s probably not worth it.

I’d be happy to help you further if you want to email me the details. johnp at milestonemtg dot com

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