Refinancing to a Shorter Term: Is It Worth the Higher Payment?
Refinancing from a longer term (commonly 30 years) into a shorter term (commonly 15 years) is a specific refinancing strategy focused on reducing total interest paid and building equity faster, at the cost of a meaningfully higher required monthly payment. It's worth weighing carefully rather than assuming shorter is automatically better. Why shorter terms carry lower interest rates Shorter-term loans generally carry a lower interest rate than longer-term loans, reflecting the lender's reduced risk over a shorter repayment window. This means a 15-year refinance benefits from both a lower rate and a shorter amortization period, compounding the interest savings compared to a 30-year loan at a higher rate. The tradeoff: a meaningfully higher payment Because the loan is paid off over half the time, the monthly principal-and-interest payment on a 15-year term is substantially higher than a 30-year term for the same loan amount, even accounting for the lower rate. This is the...