In January 2025, a 30-year mortgage loan rate is 7.07%, while the 15-year fixed-rate mortgage loan stands at 6.48%, according to Mortgage News Daily. In such a high-rate environment, refinancing to a shorter-term mortgage can save tens of thousands of dollars in interest, provided your budget allows for the higher monthly payments.

The Burden of Mortgage Interest

Much of your payment goes toward interest when you pay your monthly mortgage bill. In fact, during the earlier years of your mortgage, most of your monthly payments will primarily cover interest rather than principal.

Interest is an essential part of the mortgage lending industry. It is how mortgage lenders earn money and mitigate the risks of lending large sums of money to homeowners.

However, mortgage interest can also be a significant financial burden. For example, if you have a $200,000 fixed-rate 30-year mortgage at 7.07% interest, you will pay $279,779 in interest over the life of the loan. That's more than the loan's original principal amount.

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

The Challenge of Higher Monthly Payments

The main challenge with a 15-year fixed-rate mortgage is the higher monthly payment. Shortening the payback period can significantly increase your monthly cost. For example:

• With a 30-year fixed-rate loan of $200,000 at 7.07%, your monthly payment would be approximately $1,341.
• With a 15-year fixed-rate loan of $200,000 at 6.48%, your monthly payment would increase to $1,742.

That difference is $401 more monthly or $4,812 more yearly. While the interest savings are substantial, the increased monthly payment can make a 15-year loan unaffordable for some borrowers.

The Equation Changes When Rates Drop

Refinancing to a shorter-term loan becomes more feasible when mortgage interest rates are lower. A lower rate means smaller increases in monthly payments when switching from a 30-year to a 15-year term. For instance:

• If you already have a 30-year fixed-rate loan at 7.07% interest, refinancing to a 15-year fixed-rate loan at 6.48% interest could save you tens of thousands in interest.
• The shorter term significantly reduces total interest paid, even if your monthly payments increase.

Crunching the numbers can help determine whether refinancing makes sense based on your financial situation.

The Benefit of Refinancing

Refinancing to a shorter-term loan allows you to pay off your mortgage faster, build equity more quickly, and reduce the total interest paid. However, this option comes with the trade-off of higher monthly payments.

Take a $200,000 loan as an example:

• At 7.07% interest on a 30-year term, you would pay $279,779 in interest.
• Refinancing to a 15-year term at 6.48% interest would reduce your total interest to $113,971—a saving of $165,808.

While the monthly payment difference of $401 may seem steep, consider the long-term benefits of reducing your overall interest cost.

Is Refinancing Right for You?

Refinancing to a shorter-term loan can be an excellent financial strategy if:

• You have a steady income that can support higher monthly payments.
• You have a strong credit score, which qualifies you for competitive interest rates.
• You plan to stay in your home for the foreseeable future.

If you are unsure, consult a financial advisor or mortgage professional to review your options. They can help you evaluate your household budget and determine whether refinancing aligns with your long-term financial goals.

Final Thoughts

Mortgage interest is necessary for homeownership, but minimizing it can save you significant money. By refinancing to a 15-year mortgage, you can dramatically reduce the total interest paid over the life of your loan.

However, the key is ensuring that the higher monthly payments fit comfortably within your budget. Crunch the numbers carefully, and don't hesitate to seek professional advice to determine if refinancing is right for you.