As part of the economic impact of the pandemic coronavirus, mortgage rates reached the lowest levels in history, and the application for refinancing accumulate — they became 3-4 times more than last year at this time, writes Yahoo Finance.
If you have a house, a 30-year mortgage and you have come to the conclusion that you could benefit from refinancing, it may seem a natural decision to take another loan for 30 years. You will reduce your monthly payment, possibly by hundreds of dollars, which is a great way to give your budget a break during this time of economic stress.
But in the process you will increase your overall costs — often significantly.
Personal financial expert Suze Orman says that it is wiser to go for the 15-year loan. Other experts believe that the reduction of the term loan is not a smart idea, especially during the current crisis. The publication presents the arguments on both sides, to help you decide whether a 30-year or 15-year refinancing is the right choice.
The benefits of refinancing into another 30-year mortgage
If you replace an older 30-year mortgage with a fixed rate new, you will probably get a much lower mortgage rate and reduce their monthly housing costs.
30-year mortgage rates fell to a record low of 3.23%, according to mortgage company Freddie Mac. A year ago the average was of 4.20%, and two years ago — of 4.58%.
“The cost of borrowing has never been cheaper for homeowners,” says Grant moon, founder and CEO of Home Captain Realty.
15-year mortgage with a fixed interest rate have even lower rates than 30-year loans: currently the average of 2.77% compared to 3.64% a year ago to 4.02% at this time in 2018.
But moon says that it is better to choose a 30-year mortgage for refinancing in the current environment, because 15 year loans come with higher monthly payments.
“Your payment will likely increase, and with the uncertainty in the economy, when 30 million people applied for unemployment benefits, it can be a dangerous proposition, if the borrower lose his job and gets stuck on the higher payment amount”, — he said.
Use the mortgage calculator and you will see that 30-year mortgage of $250 000 under a fixed rate of 3.23% requires monthly payments of $1085. A mortgage of the same size for 15 years at 2.77 percent have a higher monthly payment: around $1700.
The advantages of refinancing a 15 year mortgage
For borrowers who can cope with higher payments, a 15-year mortgage refinance has advantages, says Richard Pisnya, Director of Silver Fin Capital, a mortgage company broker in great Neck, new York.
“They will not only pay a lower interest rate on the loan, but will reduce the number of years on the loan, thereby saving an enormous amount of interest,” says Pisnya.
With a 15-year mortgage in the previous example — in the amount of $250,000 with an interest rate of 2.77% — interest expense of more than $55 800 over the life of the loan.
30-year mortgage with the same amount under 3,23% will cost much more: about $140 700 percent.
Suze Orman suggests to consider the interest burden for a hypothetical homeowner who paid for a 30-year mortgage with a fixed rate for 14 years.
“Now you decide to refinance and take out a new 30-year mortgage, she writes in her blog. — Of course, the new mortgage will be at a lower interest rate, but you just extended the mortgage payment in the house to 44 years! It’s 44 years of interest payments”.
But the moon of the Home Captain Realty doubt that many homeowners are sitting on mortgages that are more than 10 years.
“The refinancing boom in the U.S. began in may last year, and many of those who had the right to refinance — or that had meaning for them — have already refinanced,” he says.
Make your choice
Your decision on the term mortgage refinance ultimately depends on how confident you are in your current financial situation.
“The borrower needs to compare the difference in monthly payments between a 15 – and 30-year mortgages with a fixed rate to determine their own level of comfort,” says Alan Rosenbaum, founder and CEO of new York mortgage lender GuardHill Financial Corp.
A 15-year mortgage has financial benefits, but they can be risky, says Pisnya.
“The borrower needs to understand how a larger monthly payment will affect its cash flow and what financial impact this will have on him if he’s going to lose all of the monthly income, which is currently,” he says.
If you refinance mortgage loan 15 years your monthly payments become too large, you can’t just re-send the loan payments over 30 years.
If you are not going to stay in the house for a long time, you can take the advantage of another 30-year mortgage and lower her monthly payments. If you move every few years what is the significance of how many years you took the loan?