Is It Better To Prepay Or To Refinance?

Should you refinance to a lower rate or make extra payments to save on interest?

Is It Better To Prepay Or To Refinance?
May 11, 2016

As mortgage interest rates drop, many homeowners are making the decision to refinance to lower their monthly payments. However, some of these same homeowners have paid extra on their monthly mortgage payments for years and are set to pay off their mortgages early. Is it worth refinancing to a lower interest rate if it means resetting the life of the mortgage?

Experts say it often depends. While most conventional mortgages and mortgages through the VA and FHA do not have any prepayment penalties, some do. In that case, paying off the mortgage early also means the homeowner has to pay those penalty fees. For those with penalties, refinancing to a 10 or a 15-year mortgage makes more sense. The fact that interest rates for these shorter loans can be under three percent makes refinancing a very good option for those who may have to pay penalties.

However, making additional payments or prepaying can save a large amount of money, because any additional payment made over the monthly amount is applied directly to the principal. This can be very helpful during the early part of the mortgage when most of the monthly payment is applied to interest rather than the principal. Even a small amount extra can add up and take several years off the end of the loan. For those who are more than halfway through their mortgage, it may make more sense to make larger additional payments than to refinance.

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Steffanie | 05.11.16 @ 17:02
We have never been able to pay extra each month, so refinancing was the way to go for our family. We were able to take 10 years off of our mortgage.
Kamie | 05.11.16 @ 17:02
I never realized that if you are wanting to pay off your stuff early you have to pay a fee for it, that seems like it just promotes for people top take their time to pay things off.
irene | 05.11.16 @ 17:02
Very interesting, I can see how it could depend on each individual situation
Erin | 05.11.16 @ 17:03
Good information. We have refinanced a couple of times as well as paying more when we can. I can certainly say I will be glad when our mortgage is paid off completely!
Carla | 05.11.16 @ 17:04
I do wish our payments were low enough so that we could pay extra. I hope to look into refinancing in a couple of years.
Beverly | 05.11.16 @ 17:05
I think you you have to decide all the options that are best for you. If you pay your house off completely you lose that tax write-off, so sometimes it is better to refinance.
Jackie | 05.11.16 @ 17:05
When we bought our home we had it written into the contract that there was no prepayment fee. It is saving us thousands of dollars.
Sarah | 05.11.16 @ 17:06
good things to chew on when deciding which route to go with your mortgage.
trish | 05.11.16 @ 17:06
I wish we were able to pay extra each month. Refinancing would be our only option.
$commenter.renderDisplayableName() | 11.24.20 @ 09:27