How to Reduce a 30-Year Mortgage to 15 Years

Paying extra against your mortgage will save interest over the long run.

If you have managed to survive the current economic crisis with your job and savings intact, the option to refinance to a 15-year mortgage has never been better. The average rate for a 30-year mortgage is currently below 5 percent, while the average for a 15-year mortgage is almost .75 percent lower, in some areas even below 4 percent. This differential in cost can add up to a huge interest savings over the life of the mortgage. For the cautious borrower, or the person who is still a little uncertain about the short-term, it may be better to have the 30-year mortgage and make extra principal payments than to lock in a 15-year mortgage. The reason is simple -- if you get into a financial bind, you can always drop back down to the 30-year payment. A 15-year mortgage must be paid fully regardless of your financial situation.

Instructions

1. Maybe you are too far into your existing mortgage to justify the cost of a refinance. According to the Mortgage Banker's Association, closing costs average about 2 percent of the value of the loan. On a $200,000 mortgage, that amounts to $4,000. That amount will have to be recovered with the savings on a refinance. If you started with a $200,000, 30-year mortgage at 5.75 percent three years ago, your current balance is about $191,000, with your monthly principal and interest payments about $1165. Online mortgage calculators with amortization schedules, like the one on the Bankrate.com website, make these calculations easy.

2. Using the payment calculator, you find that a new 30-year mortgage, at the current average rate of 4.625 percent would cost $1000, saving you $165 per month. At that rate, it takes only two years to recover the cost with your monthly savings. Refinancing is a good option, as long as you have enough equity to meet the loan to value guidelines.

3. If you don't have enough equity, but you have plenty of current cash flow to handle a higher payment, the next step is to create your own refinance program and early payoff schedule. Go back to the calculator; enter the variables for a 15-year mortgage at 3.75 percent for $190,000. The payment is $1381. When you enter this into your financial calculator, however, the result is it takes 20 years to pay off the balance.

4. How do you get the 15-year payoff? On the Hewlett Packard Model 12C financial calculator, you enter: 190,000 [PV]; 5.75 [g][i]; 15 [g][n]; PMT. The answer is 1653. This is the payment amount needed to pay the existing mortgage off in 15 years. If you round this payment up further, to an even $1700, you will accomplish this goal even seven months faster. The total savings over the life of this loan is almost $96,000.

Tips & Warnings

• To maintain a record of your extra principal payments, use a separate check.

• As you get additional raises, use that as an opportunity to increase your principal payments.

• Make sure your mortgage company actually applies your payments to principal.

• Check your statement every month to verify the balance is declining equal to your payments.

References

• Bankrate.com: Home
• Mortgage Bankers Association: Mortgage Rates