In January 2025, the rates on 30-year fixed-rate mortgages are 7.07%, and 15-year fixed-rate mortgages stand at 6.48%, according to Mortgage News Daily. While these rates are higher compared to historic lows, refinancing to a shorter-term mortgage can still save you tens of thousands of dollars over the life of your loan—provided your budget allows for the higher monthly payments.

The Burden of Mortgage Interest

When you pay your monthly mortgage bill, much of your payment goes toward interest. During the earlier years of your mortgage, most of your payment goes to interest rather than principal.

Interest is a fundamental part of the mortgage lending industry. It's how lenders earn revenue and mitigate their risks when lending large sums of money to homeowners.

However, mortgage interest can be a significant financial burden. For instance, if you have a $200,000 fixed-rate 30-year mortgage at 7.07% interest, you will pay $279,779 in interest alone if you take a full 30 years to pay off the loan.

Now consider refinancing that same loan into a 15-year term at 6.48% interest. Over the 15-year repayment period, you would pay $113,971 in interest. That represents a saving of $165,808 in interest payments.

The Challenge

The higher monthly payment is the main challenge of switching to a 15-year fixed-rate mortgage. A shorter payback period increases monthly costs significantly. For example:

• A 30-year fixed-rate loan of $200,000 at 7.07% interest would have a monthly payment of approximately $1,341.
• A 15-year fixed-rate loan of $200,000 at 6.48% interest would have a monthly payment of roughly $1,742.

This difference of $401 more per month or $4,812 more per year makes a 15-year mortgage unaffordable for many borrowers, even though it offers significant interest savings.

Low Interest Rates Change the Equation

If mortgage rates were lower, the financial trade-offs of refinancing would shift. For instance, refinancing from a 30-year fixed-rate loan at 7.07% to a 15-year fixed-rate loan at 6.48% might result in a manageable monthly payment increase depending on your household budget.

Refinancing to a shorter term means you can save tens of thousands of dollars in interest while paying off your loan faster. However, even with lower rates, ensuring the new monthly payment fits within your financial means is essential.

Low Interest Rates Example

Take a $200,000 loan as an example:

• At 7.07% interest on a 30-year fixed-rate loan, the total interest paid would be $279,779, with a monthly payment of $1,341.
• Refinancing that same loan to a 15-year fixed-rate loan at 6.48% interest would result in a total interest payment of $113,971, with a monthly payment of $1,742.

While the monthly payment increases by $401, the long-term savings in interest—$165,808—can make the switch worthwhile for those who can afford the higher payments.

Is Refinancing Right for You?

Refinancing to a shorter-term mortgage may be a sound financial strategy if:

• You have a stable income. The higher monthly payment won't strain your budget.
• You qualify for competitive interest rates. A strong credit score and steady financial history improve your refinancing options.
• You plan to stay in your home long term. Refinancing makes sense if you plan to stay in your home for several years to recoup closing costs and benefit from interest savings.

If you're unsure whether refinancing is right for you, consult a financial advisor or mortgage professional. They can help assess your household budget and determine whether refinancing aligns with your financial goals.

Final Thoughts

Mortgage interest can be a significant expense over the life of your loan. Refinancing to a shorter-term mortgage allows you to reduce this cost significantly while building equity faster.

However, this option requires careful planning to ensure the higher monthly payment fits comfortably within your budget. By crunching the numbers and consulting with experts, you can decide whether refinancing a 15-year mortgage is right for you.