Refinancing? Should You Move to a 15-Year Mortgage?

Record low rates luring many to choose shorter loan

by: Karen Kroll | from: AARP Bulletin | June 23, 2010

                     Related
                     • Mortgage Payoff Calculator
                     • Mortgage Refinance Calculator
                     • Should you pay off your mortgage?

— Samuel Hicks/Gallery Stock

Does This Strategy Make Sense?

What about refinancing, but taking out a new 30-year loan, and investing the money that you save, assuming the interest rate drops?

“Conceptually, this is a great idea,” says Jason Lilly, director of portfolio management with Rockland Trust in Osterville, Mass. After all, the stock market has returned more than 5 percent (the current interest rate on many mortgages) over most time periods.

However, this strategy can be tough to carry out. First, stock prices typically are more volatile than real estate prices, so you have to be able to live with the market’s ups and downs, says Leland Gustafson, professor of economics at the University of West Georgia.

Moreover, you need to be disciplined. If you decide to skip investing for a few months here and there so you can take a vacation and redecorate the family room, you’ll be setting yourself back.

With interest rates for 15-year mortgages at record lows, it’s not surprising that a growing number of homeowners are choosing to refinance with 15-year loans instead of the traditional 30-year. The payback for older Americans could mean paying off the mortgage before retirement, but there are some pros and cons to consider.

For Indianapolis-based Lauren Windle and her husband, both 55, refinancing their 30-year mortgage with a 15-year loan will help ensure that their home is just about paid off by the time they’re ready to retire. Although the interest rate on the new loan is about 0.75 percent lower, the new loan still will boost their payments by about $100 per month. In addition, the Windles are planning to make additional principal payments in order to whittle down their balance even more quickly.

While that means a bit of sacrifice—they’ve cut back on trips, dinners out and clothing purchases, for instance—it’s worth it, Windle says. “We expect to live a number of years, and want to make it as convenient and pleasant as possible. Better to bite the bullet now,” and not worry about finances later, she says.

For other people, like Wendy Sheridan of Rahway, N.J., a 15-year loan is a no-brainer. She and her husband refinanced a 30-year mortgage in late 2009. Sheridan, 52, had come into an inheritance, which allowed her to pay off about two-thirds of their previous mortgage. In addition, the couple was able to cut about 1.5 percent from their interest rate.

In the end, their monthly payments dropped by about $1,000, enabling them to put more toward retirement and college costs for their daughter in high school. And what’s more, Sheridan adds, “By the time the loan is paid off, it will be right around my retirement.”

But for those who can’t afford the higher monthly payments, a 30-year mortgage makes more sense.

John Sullivan, 64, who works in the real estate industry in Bethesda, Md., refinanced in the spring of 2009, but decided to stick with a 30-year term. “As a buyer’s agent, I work on commission, so my flow of income isn’t always consistent,” he says.

The longer loan offered some flexibility. Even so, Sullivan says he has been disciplined about bumping up each monthly payment by about 25 percent, and plans to continue doing that.

All in all, the low interest rates are helping attract a growing number of homeowners to 15-year mortgages. Such loans made up about 24 percent of all refinancing applications in April 2010, versus 13 percent one year earlier, reports the Mortgage Bankers Association.