Refinance or Prepayment: Which is Best?

Is it best to make extra payments OR refinance?

Many consumers look at the mortgage market today with some trepidation and it isn’t unfounded. Bouncing interest rates, long lines at the closing desk and tougher standards than ever before can make refinancing seem like a real hassle. Of course, tiny interest rates and home values that appear to be moving in the wrong direction may spur a lot of consumers into choosing a refinance over simply paying down their mortgage by making extra payments. Which is best for you? Well, let’s ask an expert.

Jack Guttentag, the Home-Account.com mortgage professor, describes prepayment vs. refinance inquires as, "Some of the most difficult questions I receive…" He goes on to say that, "Extra payment decisions and refinance decisions should be made independently because they are based on very different factors."

So, What are Those Factors?

In short, it’s you. Consider the fact that both prepayment and refinancing come with similar advantages. They can both lower the amount of money you spend to own your home and can decrease the length of time you hold your loan. Consumers who simply want to pay off their mortgage may find that extra payments are the way to go. Those that want to lower monthly payments will look to refinancing first as a way to do it, even if they have to increase or reset their loan length. This is why the first step in deciding which is best is to know what your goals are in home ownership.

Separating the Questions

Rather than asking which is best, the Guttentag recommends, "[Making] the refinance decision first, if it pays to refinance, do it. Consider whether you want to make extra payments after you refinance, or if you don’t refinance." This will allow you to take full advantage both, neither, or just one of these similar money saving options.