Should you convert to a 15-year loan? Do the math

Now that the average 15-year fixed mortgage rate is at a record low -- 3.82 percent, according to Freddie Mac -- would it make sense to take advantage of it and refinance from a 30-year loan to a 15-year loan? Here’s how to decide:

Find out if you qualify
“Look at the impact on your cash flow for the household,” says Mike McHugh, president of Melville-based Continental Home Loans. “Even though the rate drops, typically the payment increases. Are you able to qualify and juggle the payment differential?”

You’ll have to meet credit and debt-to-income ratio criteria. If you’ve got revolving credit card debt, paying that down is a more sensible path for you than refinancing, McHugh says. If you can’t quite afford the shortened loan, there’s another option, he says. “Sometimes you can prepay your 30-year loan. Make principal reduction payments to reduce the term.”

Identify your goal
Do you need more cash today? Or is your goal to pay less over the life of the loan? Reducing the loan term isn’t likely to put more money in your pocket in the short term. But increased payments are not always a bad thing if you can afford them, says Bryan Smith of Quality Financial Solutions in Commack. “You have to remember that although on a monthly basis your payment may go up, in the long run you’ll build equity quicker, you’ll own your home quicker and you’ll save tens of thousands worth of interest over the life of the loan.”

Crunch the numbers 
An online mortgage calculator can help you to plug in all the particulars, such as interest rate, principal and loan term, and see how different payment scenarios would play out. But here’s how to do a ballpark estimate.

Let’s say you have 23 years left on a 30-year loan, and you want to reduce the loan term to 15 years. First, multiply your current monthly payment by the number of months you’ll shave off the loan by reducing the term. So if you pay $1,000 a month and you’ll be knocking 96 months (eight years) off your loan term, that’s $96,000. 

Next, multiply the increase in your monthly payment by the number of months you have to pay on the new loan. So if your new payment is $250 more a month and you’ll have to pay that for 180 months (15 years), that’s $45,000. 

Subtract the first number from the second to estimate your savings -- in this case, $51,000 over the life of the loan.

VIDEO: New life for a 19th century home
CHECK See LI's best mortgage rates
LISTINGS: LI homes for sale and open houses
PHOTOS: Glass homes in Westhampton Beach | Lattingtown
TIPS: Buying tips | Home financing 101