Yes, you can absolutely refinance a 15-year mortgage to a new 30-year mortgage to get lower monthly payments, though you'll pay significantly more in total interest over time, as it restarts your loan term and spreads payments out longer. This strategy is common when financial situations change, freeing up cash flow, but it's crucial to weigh the short-term payment relief against the long-term cost increase and consider if you plan to stay in the home long enough to benefit.
Choosing to refinance from 15-year to 30-year mortgage options is not easy. You may have refinanced into a shorter loan term several years ago, but financial situations can change quickly. While you felt comfortable with higher mortgage payments at the time, they are no longer tenable.
A 15 year mortgage is paid off twice as fast and saves a considerable amount of interest compared to a 30 year mortgage, but the monthly payment amounts will be significantly higher. With inflation, the value of the house usually increases and the value of the money being used to pay off a 30 year mortgage declines.
Switching to biweekly payments results in making one additional payment per year, which can reduce your mortgage term by a few years. Refinancing to a lower interest rate and/or a shorter term can help homeowners pay off their mortgage faster.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
When you make an extra payment or a payment that's larger than the required payment, you can designate that the extra funds be applied to principal. Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay.
Paying an extra $500 a month on your 15-year mortgage drastically shortens your loan term, saves you tens of thousands in interest, builds equity faster, and helps you become mortgage-free years sooner, effectively turning your 15-year loan into a much shorter one, potentially paying it off in less than 10 years depending on your loan details.
How much is a $400,000 mortgage over 30 years? For a $400,000 mortgage over 30 years, your monthly payments will be approximately $1,686 based on an APR of 3%. This estimate only includes the principal and interest amounts.
Dave Ramsey strongly advocates for 15-year, fixed-rate mortgages as the quickest path to wealth, emphasizing lower total interest, faster equity building, and less debt, asserting that if you can't afford the higher payments, you can't afford the house; he recommends buying with cash if possible, but a 15-year loan is the preferred borrowing option, keeping your payment under 25% of your take-home pay.
The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years.
When you make an extra repayment, you chip away at your principal amount. Because the interest charged on your home loan is based on your outstanding loan amount, the more principal you pay, the less you'll be charged in interest.
Overpaying your mortgage can have big benefits, including clearing your repayments sooner and paying less interest.
Here are some ways you can pay off your mortgage faster:
In general, lenders charge higher interest rates for loans that they perceive as riskier. The shorter a loan's term, the lower the risk of default from the borrower, so it means that 15-year mortgage rates are usually lower than 30-year mortgage rates.
The 28/36 Rule
Here's an example: If your gross annual income is $200,000, that's $16,666 per month. So with the 28/36 rule, you could aim for a monthly mortgage payment of about $4,666—as long as your total debt (including car payments, credit cards, etc.) isn't more than $6,000.