Our adjustable rate mortgage will soon be up for renewal. We are wondering if taking a new, 15-year mortgage is a good idea. What do you think?
If you have enough equity in your home to qualify for a fixed-rate mortgage, the 15-year plan is usually recommended.
Many borrowers attracted to the 15-year have already owned their homes for several years. They would prefer to shorten the mortgage term rather than extend it for 20 or 30 years.
It's a good idea, but the main question you must ask yourself is whether you can afford the higher monthly payment now and for 15 years to come. Of course, interest rates on the 15-year are lower, so that helps.
Recently, interest rates on a 15-year mortgage averaged 6.3 percent. That's significantly better than rates of 6.96 percent to 7 percent which were being charged for the 30-year.
Here's an example that will give you an idea of the difference in payments. The monthly payment on a $100,000 mortgage at 6.25 percent interest over 30 years is $615.72. The monthly payment on a $100,000 mortgage at 6.25 percent interest over 15 years is $857.42.
Currently about 90 percent of the mortgages in the U.S. are 30-year fixed rate, according to Bankrate.
However, with the larger payments, you will also build equity faster and pay less interest over the life of the loan.
What you don't want to do is severely impact your budget.
Choosing a fixed rate gives you reduced risk of market changes: If you currently have an adjustable-rate mortgage (ARM), refinancing provides an opportunity to transition to a fixed-rate mortgage that offers stability and protection against sudden interest rate increases.