Should you refinance to a 30- or 15-year mortgage as rates fall again?

Is a mortgage refinance still on your to-do list? A recent Zillow report found more than three-quarters of homeowners never got around to it over the last year of lower-than-ever mortgage rates, even though many who did refinance say they're now saving at least $300 a month.

Rates remain historically cheap — in fact, they've been going down, after rising during the spring — so a refi could give your budget some breathing room during a time of lingering economic stress.

If you own a home, have a 30-year mortgage and could benefit from refinancing, it's natural if your first thought might be to seek another 30-year loan. But there are good reasons to consider refinancing to a 15-year mortgage instead.

Personal finance personality Suze Orman says it's wiser to refi into a 15-year loan. "Do not refinance and extend your years," she told People in a recent interview. Yet other experts say shortening your loan term may not be the smartest idea.

Advantages of refinancing to another 30-year mortgagefizkes / Shutterstock

After climbing earlier in the year, rates on 30-year fixed-rate home loans have dropped back below 3% in recent weeks and have been sinking deeper. At current rates, more than 14 million Americans with 30-year mortgages could refinance and save an average $287 a month, mortgage data and tech firm Black Knight has said.

Those refi candidates are sitting on loans with rates at least three-quarters of 1 percentage point (0.75) higher than rates now available on 30-year fixed-rate mortgages. Those are averaging 2.90% in the latest weekly survey from mortgage giant Freddie Mac — not too far above January's record low of 2.65%.

If your mortgage is from 2019, you might easily have a rate that's over 4%.

Fifteen-year fixed-rate mortgages come with even lower rates than 30-year loans. Rates on the shorter-term mortgages are now averaging 2.20%, Freddie Mac says.

But 15-year loans also come with much stiffer monthly payments, and taking on a high payment may be risky amid the current economic uncertainty. Though the stock market keeps shooting to new all-time highs, more Americans are signing up for unemployment benefits and the nation's jobless rate is rising.

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A $250,000, a 30-year fixed-rate mortgage at 2.90% has a monthly payment (principal and interest) of $1,041. The same size mortgage for 15 years at 2.20% has a much steeper monthly tab: about $1,632.

Advantages of refinancing to a 15-year mortgageInk Drop / Shutterstock

For borrowers who can manage the higher payments, 15-year mortgage refinances have benefits, says Richard Pisnoy, a principal with Silver Fin Capital, a mortgage broker in Great Neck, New York.

"Not only will they be paying a lower interest rate on the loan, but they will reduce the number of years on the loan, thus saving an enormous amount of interest," Pisnoy says.

With the 15-year mortgage in the earlier example — in the amount of $250,000 and at 2.20% interest — the interest costs would total more than $43,700 over the life of the loan.

The 30-year mortgage in the same amount at 2.90% interest would have far higher lifetime interest costs: over $124,600.

Suze Orman says consider the interest burden for a hypothetical homeowner who has already been paying on a 30-year fixed-rate mortgage for 14 years.

"Now you decide to refinance and you take out a fresh 30-year mortgage," she writes, on her blog. "Sure, the new mortgage is at a lower interest rate, but you just extended your mortgage payment on this home to 44 years! That’s 44 years of interest payments."

How to make your choiceAntonio Guillem / Shutterstock

Refinancing to a new 30-year loan would chop down your monthly mortgage costs. Refinancing to a 15-year mortgage would reduce your long-term costs. Your decision ultimately comes down to how confident you feel about your current financial situation.

In the Zillow survey, over half the respondents who did refinance in the last year said they're now saving $300 a month or more, and are often using that money to make home renovations or pay off debt.

Though 15-year mortgages have financial benefits, they can be risky, Pisnoy says.

"The borrower needs to understand what the impact of a larger monthly payment will do to their cash flow and any financial impact this will have on them should they lose any monthly income they currently have," he says.

If you refinance into a 15-year home loan and the monthly payments become too much, you can't just start sending your loan servicer 30-year-size payments. That won't cut it.

Going with another 30-year mortgage and its lower monthly payments can be the smarter move if you're not likely to stay in the house for the long haul. If you may be moving out within a few years, what does it matter whether you have a 30- or a 15-year loan?

Regardless which mortgage term you choose, be certain you have enough home insurance. Get quotes from multiple insurers and compare the rates, to get the right homeowner coverage at the best price.

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