Refinance or make extra mortgage payments?

When you have extra money and a mortgage, two options are always on the table: refinance to a lower rate, or keep your current loan and make extra principal payments. Both reduce total interest paid, but they work differently and fit different situations.

How refinancing works

Refinancing replaces your current mortgage with a new loan — ideally at a lower rate, shorter term, or both. The benefit is a permanently lower rate on the remaining balance. The cost is closing costs, typically 2-5% of the loan amount. The break-even point — total closing costs divided by monthly savings — tells you how many months before the refinance pays for itself. If you will stay longer than the break-even, refinancing wins. If you might move before then, it likely does not.

Refinancing also resets your amortization clock. Ten years into a 30-year loan, refinancing to a new 30-year adds 10 years to your payoff timeline even if the rate is lower. Many borrowers refinance to a 15- or 20-year term to avoid this.

How extra payments work

Extra payments applied to principal reduce the balance on which future interest accrues. Every dollar paid toward principal today eliminates future interest on that dollar for every remaining month of the loan. Extra payments require no closing costs, no credit check, and no new loan terms. You can make them whenever cash flow allows — a bonus, a tax refund, or a variable extra amount. The flexibility is the main advantage.

When refinancing usually wins

Refinancing tends to win when the rate drop is significant (0.75%+), closing costs are reasonable, you plan to stay well beyond the break-even period, and your credit qualifies for the best available rate. At a 1% rate reduction on a $350,000 balance, monthly savings might be $200-$220 — enough to break even on $10,000 in closing costs in about 4 years.

When extra payments usually win

Extra payments tend to win when refinancing costs do not justify the savings given your timeline, your current rate is already low (under 4%), or your financial situation is variable. Extra payments are optional; a new mortgage payment is not. They also win when you are close enough to payoff that the amortization reset of a new loan works against you.

Frequently asked questions

How do I calculate the break-even on a refinance?
Divide total closing costs by monthly payment savings. If closing costs are $8,000 and your payment drops by $180, break-even is about 44 months. If you will stay for 5+ years, the refinance is likely worth it.

Is it better to make extra payments or invest the difference?
At low mortgage rates (3-4%), expected long-term investment returns often exceed the guaranteed interest savings. At higher rates (6.5%+), the guaranteed return from paying down debt becomes more competitive. Your risk tolerance and proximity to retirement both factor into this decision.