Is It Better To Prepay Or To Refinance?

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?

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

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.