Is it a Good Idea to Refinance to a 15-Year Mortgage?

I didn't sell a kidney, any part of my self, or my soul. What I did took a bit of research and time, and a decent credit score. What did I do? I refinanced my family's biggest asset, our home, to a very conservative 15-year fixed rate mortgage. Is it right for you? That depends.

I figured that by refinancing our mortgage, we would free up an extra 5-years of my husband's annual income for use in other things. Our mortgage payment was about $1200 a month, and not paying our mortgage for 5 years means many things to us--helping children through college, boosting our retirement savings, or buying a small retirement home in a desirable location while we turn our paid-for family home into a revenue-generating rental.

Suze Orman says in her books that for a middle-income family, owning their home free and clear can have an emotional and psychological effect beyond the money savings. I agree. With a home that is paid for, I will have a home that only requires annual tax payments in my later years, when my income will probably be reduced.

I am not a mortgage agent, nor do I work in any part of the housing industry. I'm a stay-at-home mom, and was looking for a way help my family get ahead. I discovered that after being in our home for almost 5 years, we had accrued VERY LITTLE equity on our house.

Why? Because our 30-year loan was set up to pay most of the interest before we paid off principal (the part of the house payment that pays off the loan.)

Out of curiosity, I began doing some comparison shopping online. Using interest rate calculators and loan-comparison wizards, I was able to determine that if we refinanced our home and paid a higher mortgage payment, we would be able to build equity much faster.

In a traditional 30-year loan, during the first 15 years you build little equity as you pay off the interest due. Meanwhile, from day 1 of a 15-year loan, your loan pays approximately half interest and half principal.

Here is a rate comparison for a $100,000 mortgage. In today's rate environment, most Americans would be thrilled to pay on "only" a $100,000 mortgage, and it seems like an easy round number to work with.

Typically, the point spread between a 30-year and a 15-year loan is about 1/2 of a percentage point. I chose to compare:

• A 30-year, 100K mortgage at 5.75%
• A 15-year, 100K mortgage at 5.25%

This is what the amortization table looks like:

Although refinancing to a 15-year loan has some strong advantages, they come with a price. Your loan payment will higher—possibly much higher. Our increased loan payment put a strain on our budget that was uncomfortable at times. If your home is a starter home and you have two incomes contributing to your loan payment, this may not be a significant factor. But if you are making loan payments on a modest one-income budget, or if you bought the most home you could afford on a 30-year loan, then you may want to consider how a significantly higher loan payment will affect your family budget.

Credit card debt, student loan debt, or other personal circumstances may make a 15-year loan an undue burden on your family's budget. In an economy with skyrocketing fuel and food costs, you may do better to hold onto your money. 

How much will it cost me to refinance? (Ours cost almost $4,000).

• Do I have good credit and will my rate be lower now if I refinance?
• Can I afford to be locked into a higher payment?
• IF you have the self-discipline, you could make an extra payment instead of refinancing. There are online calculators that explain how to do that too...
• Do I have enough financial reserves to make the payment if I get behind?
• Does my family plan to stay in the house for about 5 years to pay for the extra costs of refinancing?
• Is my house still worth what I paid for it? You are probably ok if your house is 6 years old or older, but you investigate the value of your home and consult an advisor before making any financial moves.
• Could I make more money using the extra payment in a different investment?