Refinancing is all the rage among homeowners in 2020 as mortgage rates keep hitting new record lows amid the economic chaos caused by the coronavirus.
If you think you’re ripe for a refi, you likely want to find the lowest mortgage rate you can — but you also should give some thought to your loan term.
The 30-year fixed-rate mortgage gets all the attention because it’s America’s most popular type of home loan, and maybe that’s what you currently have.
But if you’ve been in your home a few years, refinancing into a 15-year mortgage can keep you from dragging out the debt and your interest costs. The loans come with lower interest rates than 30-year mortgages, but the monthly payments are higher.
Here are four tips on how to get the very best deal when refinancing into a 15-year mortgage.
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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.
On a $200,000 loan, you might qualify for a 15-year loan at 2.6% or a new 30-year mortgage at 3.15%.
Your monthly payment would be $1,343 on the 15-year loan and just $859 on the 30-year mortgage. But you’d pay total interest of about to $41,700 on the shorter-term loan, versus more than $109,000 over the course of the 30-year mortgage.
2. Shop around for a great rate
Fifteen-year mortgages have several 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, gather rates from multiple lenders.
As you research rates online, you may want to check the websites of the major banks operating in your area. They often have similar pricing on their mortgages, but you might find one offering a cheaper rate or more favorable terms.
Savvy borrowers may find more affordable rates through small local banks and credit unions, 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. A free credit monitoring service can help you fix those credit report errors.
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 score you a lower 15-year mortgage rate.
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 big enough to give you at least 20% equity will keep troublesome private mortgage insurance (PMI) premiums from being tacked onto your house payments.