Deciding what to do with your mortgage isn’t always simple. Maybe your neighbors rave about refinancing, while your cousin says extra payments are the real money-saver. The truth is, both options can work—but they fit different situations. Let’s break down each choice and see which one can help you save the most.
Refinancing: Lower Interest, Bigger Commitment
Photo by RDNE Stock project
Refinancing means swapping your current mortgage for a new one with better terms. You might refinance to:
- Lock in a lower interest rate
- Shorten your loan term (like switching from 30 to 15 years)
- Cut your monthly payment
- Switch from an adjustable to a fixed-rate loan
When It Makes Sense to Refinance:
- Current rates are at least 1% lower than your existing rate
- You plan to stay in your home long enough to recover closing costs
- Your credit score has improved, so you qualify for better terms
What to Watch Out For:
- Refinancing isn’t free. You’ll pay closing costs, often 2-6% of your loan amount.
- There’s paperwork and approval to tackle.
- If you’re close to paying off your loan, refinancing might not save enough to justify the hassle or fees.
Quick Example:
Say you have $250,000 left at 6% and can refinance to 4.5%. If you pay $5,000 in closing costs and your monthly payment drops by $200, you’ll need about 25 months to break even. Plan on selling soon? Refinancing may not pay off.
Paying Extra: Simple, Flexible, and Fee-Free
Chipping away at your mortgage with extra payments means sending in more than your standard monthly due. This approach offers:
- Total flexibility (no contracts or paperwork)
- No closing costs
- The chance to save thousands in interest
How Extra Payments Help:
- Every dollar goes straight to your loan’s principal balance
- You’ll pay less interest over the life of your mortgage
- You’ll own your home sooner
Popular Ways to Add Extra Payments:
- Round up your monthly payment (for example, pay $1,100 instead of $1,045)
- Make bi-weekly instead of monthly payments (this results in one extra payment per year)
- Send lump-sum payments when you get a bonus or tax refund
Who Should Choose This Route:
Extra payments work best if:
- You prefer flexibility—no need to commit or sign anything
- You might sell or move soon
- Current interest rates aren’t low enough to make refinancing attractive
- You want to crush debt without hidden fees
Comparing the Numbers
Refinancing and paying extra can both help you save—but not always in the same way. Think of it like choosing between running a sprint and a marathon:
- Refinancing gives you a quick break on monthly costs—if the new rate is low and you’ll stay put for a while.
- Extra payments make a long-term impact by shrinking your balance and the interest you pay, at your own pace.
Break-Even Point
Always check how many months it would take to recover refinancing costs (closing fees). If you won’t stay that long, paying extra is often smarter.
Interest Rate Environment
When rates drop, refinancing tends to save more. When rates rise, extra payments usually win.
Loan Age Matters
Near the beginning? Interest payments eat up most of your monthly payment, so both options help a lot. Near the end? It’s often better to keep your old loan and send in an extra payment when you can.
Factors to Consider Before Deciding
Making the best choice means looking at your own life, not just the math.
- How long will you stay in your home?
Short-term plans favor extra payments. - Can you afford closing costs?
Refinancing comes with upfront fees. - What are your financial goals?
Do you want to be debt-free faster, or lower monthly bills? - How steady is your income?
Extra payments let you adjust if your situation changes. - Do you qualify for a better rate?
Not everyone can refinance, especially if their credit hasn’t improved.
Tools to Help You Decide
Online calculators can help you crunch the numbers:
- Prepayment vs Refinance Calculators: Enter your loan info and see the savings from both sides.
- Break-even Analysis: Divide your refinance closing costs by your estimated monthly savings.
- Lender Advice: Sometimes, talking to your current lender gives a clearer picture. Ask about recasting your loan, too.
Real-World Scenarios
Scenario 1:
If rates have shot up since you got your mortgage, stick with what you have and toss in whatever extras you can. You’ll pay less interest without taking on new debt or fees.
Scenario 2:
Your rate is much higher than what’s currently available, and you plan to stay put for years. Refinancing now could save you money even with the upfront costs.
Scenario 3:
You’re about to retire and want no more debt. Making extra principal payments—without a refinance—lets you wipe out your mortgage on your own schedule.
The Bottom Line
There’s no one-size-fits-all answer. Refinancing brings big savings… if rates and timing line up, and you’re in it for the long haul. Making extra payments skips the red tape and costs, letting you save at your own pace.
Look at your current loan, the market rate, your cash flow, and future plans. If you’re still unsure, try out a calculator—sometimes, seeing the real numbers makes the choice clear.
What’s holding you back from saving money on your mortgage? Take a look at your statement, grab a calculator, and see how much you could save today. Your future self—and your wallet—will thank you.