Should you refinance your home from a 30 to a 15 year?
Right now, the banks and mortgage companies are encouraging you to refinance your loan from a 30 year fixed rate to a 15 year fixed rate.
Did you know that the USA is one of the few countries that offer 30 year fixed rate loans? That is an awesome opportunity for you to get a loan at today’s great rates and keep it for 30 years. As rates rise you have more cash in your pocket to do the things you want.
Banks know a shorter term is the right strategy for them. Interest rates are going to rise, and they don’t want their money held at 2 or 3% for the next 30 years. You need to consider what is right for YOU.
There are many things you should consider before you jump in feet first, here are a few.
Can you afford the higher monthly premiums?
- On a 30 year, 3%, $100,000 your monthly payment is $442
- On a 15 year, 4%, $100,000 your monthly payment is $740
- A difference of $298 each month.
Are you a spender, saver, or investor?
- If you are a spender (you spend your money on discretionary like dinner, cloths, or ball games), then invest the extra money and pay off your home faster – at least you will have something of value on 15 years.
- If you are a saver, then you may want to consider the return on your extra $298 by investing in something with a better than $% return.
- If you are an investor than you need to decide if the equity in your home is of more value than your ability to have more money for your business or other investments.
How long are you planning on living in your home?
Investigate the numbers.
- If you are only going to be there for the short term (1-3 years), you may want the additional equity for when you sell and buy another home.
- If you are planning to make this your home for years to come, then decide if you are looking for higher payments now or a steady payment over the long term.
- If you think of your mortgage as paying rent, you will never have a rent increase and you can use the additional money any way you wish (including making additional principal payments on your mortgage, but only if you want).
At the end of the day the decision is yours and should be made with a determination of how you spend and what makes sense for you. A lower rate and lower payments over a longer period of time or a house that may or may not build equity over time.