FHA Refinance Loan: 15 vs 30 Year Mortgages
by Stacey from Scottsbluff, Nebraska
Ask Kate about the FHA refinance loan: 30 year fixed rate or the shorter 15 year term... how do you decide which mortgage plan is best for you? Stacey is trying to make sense of a higher interest rate and lower monthly house payment vs a lower rate and higher payment. I can tell you a simple way to make a meaningful decision!
Refinancing with 15 Year vs 30 Year Fixed Mortgage Rates By Stacey S from Scottsbluff, Nebraska
We are wanting to refinance our mortgage from a Conventional with 7% interest rate to an FHA with 3.875% interest rate and also lower our monthly payment.
But we are only being offered that new interest rate with a 15 year term instead of 30. And if we choose the longer term, the PMI amount more than doubles and cannot be removed.
So while we want that lower interest rate, it will not lower our payment any. Will we be benefiting ourselves any with just the lower interest rate?
Ask Kate answers: Refinancing with 15 Year vs 30 Year Fixed Mortgage Rates
It's tempting for homeowners to make an emotional decision to refinance when mortgage rates are this low!
Even more so when their current rate is almost double what lenders are offering today.
1. FHA 30 Year Fixed Rate Mortgage Terms
I think you are smart to take a step back and analyze the two terms before proceeding with a refinance. One way to decide between 30 and 15 year rates is to study your motivation for refinancing.
Do you have an immediate need to lower your mortgage payment so you can pay off consumer debt? Or is your home simply no longer affordable?
Even at a higher interest rate, FHA 30 year fixed rate mortgages offer lower monthly payments. Why? Because the payoff is spread out over 30 years as opposed to 15 year terms.
But the amount of mortgage insurance that you'll be required to pay can be painful and possibly reverse the affordability benefit.
Even so, don't assume a 30 year mortgage won't necessarily result in savings without getting a written Good Faith Estimate to accurately compare your current payment to the proposed payment. Learn how to make sense of the new Good Faith Estimate form here
But on the flip side, also take into consideration the cost of the refinance which will be paid out of your equity or savings. You should also look at the Truth and Lending Statement. It discloses the total amount, including closing costs, that you'll be paying over 30 years.
However, if your budget is strapped, your house is no longer affordable but you do not want to sell, the 30 year term could
be a smart decision, even taking into consideration the higher mortgage rate and costly mortgage insurance.
Sidebar: Can FHA Mortgage Insurance (MIP) Be Removed?
One more thing. I'm relieved to hear that you are not banking on the mortgage insurance being removed. Not every borrower fares so well when they ask a lender about cancellation.
Case in point, Debbie was told that the FHA MIP would fall off soon after she bought her home. Read her story and get the nitty gritty of FHA mortgage insurance removal at Ask Kate: When Does My FHA Mortgage Insurance Cancel?
2. FHA 15 Year Fixed Rate Mortgage Terms
OK, now let's take a look at a 15 year fixed rate mortgage which features a lower rate and less costly mortgage insurance. Although 15 year rates run approximately .5% lower than their 30 year counterpart, monthly payments are higher due to the shortened term.
In the end, 15 year terms save borrowers thousands upon thousands of dollars over the life of the loan. But the monthly payment is significantly higher, bringing into question the affordability factor.
If your intention is to plan for retirement, then a 15 year payoff may be just the ticket. But make sure you can afford the payment! For example, do you have little to no debt, own a dependable car, and already have the means to pay for your child's college tuition? Depending on your income, you may be able to afford a 15 year fixed!
Otherwise, if you are stuck with a house payment that you cannot afford, the low interest rate and less costly FHA mortgage insurance is of little benefit. Worse, it could set you up for foreclosure.
So as I said earlier, do not become so enamored with a low rate that you forget to consider the affordability of the mortgage payment.
Refinancing: Is There a Better Way to Afford Your Home?
Here is another idea on the mind of many homeowners today. Why not get started on a plan to pay off your mortgage?
Although I've written extensively to help people understand the mortgage application process, I have not covered how to accelerate mortgage payoff in the same detail.
There's a reason! Until the recession, there hadn't been enough incentive for getting out of debt.
But what if you could pay off your consumer debt, effectively lower your mortgage rate - with or without refinancing - and
beat the bank at its own game?
Read how this is possible (and easier than you might imagine) at The Mortgage Freedom Project
Here's to an affordable mortgage or better yet, paying off your mortgage!
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