Refinance or make extra mortgage payments?

Build a like-for-like baseline

Start with the current unpaid principal balance, note rate, remaining term and principal-and-interest payment. Request a payoff amount when a real refinance is being considered because the CFPB explains that payoff differs from current balance by accrued interest and potentially fees or a penalty.

For the new loan, use a Loan Estimate rather than an advertisement. Include lender charges, points, appraisal or valuation costs, title and settlement charges, government fees and any amount financed into the new balance. Prepaid taxes, insurance and initial escrow affect cash to close even though they are not all finance charges.

Example: a lower payment with a longer clock

A homeowner has twenty years left but receives a quote for a new thirty-year mortgage. The quoted payment is lower, yet ten additional years may increase total interest and keep the balance higher at the expected moving date. They compare a twenty-year refinance, a thirty-year refinance and keeping the existing loan with extra principal.

They also test how long it takes for monthly savings to recover net closing costs. If the expected holding period is shorter than that recovery period, the lower rate may not produce a net benefit. Approval and rate lock are not assumed until documented.

Comparison worksheet

1. Choose a horizon based on a realistic move or review date.
2. Request the current payoff amount and any prepayment penalty.
3. Collect comparable Loan Estimates for actual refinance options.
4. Include financed costs in the new balance and cash costs separately.
5. Compare payments, total cash outflow and remaining balance at the horizon.
6. Stress-test an ARM or uncertain holding period instead of using one forecast.

Reasons not captured by the headline rate

A refinance may change servicing, escrow funding, mortgage insurance, assumability or loan protections. Extra principal may preserve a valuable fixed rate but reduce liquid savings. Neither option automatically outranks emergency reserves or higher-cost obligations.

• Do not count an escrow refund twice in the comparison.
• Check whether points reduce only an ARM introductory rate.
• Compare the same remaining term when isolating rate effects.
• Keep cash-to-close separate from long-term interest.
• Use housing counseling or licensed professional help for a distressed loan.

Use a calculator as a scenario, not a promise

Use the calculator for the keep-and-prepay scenario. A refinance requires a separate schedule based on the new principal, rate, term and costs; subtracting a quoted rate without rebuilding the loan is not a valid comparison.

The U.S. model uses standard principal-and-interest amortization. Monthly payments use the entered contract rate; the true-biweekly option assumes half the monthly principal-and-interest amount is credited every fourteen days. Every entered extra is assumed to reach principal.

Taxes, homeowners insurance, escrow, PMI, HOA charges, servicing suspense accounts and future ARM changes are outside the schedule. Reconcile the baseline with a statement and rerun whenever rate, payment, balance or posting changes.

Review the plan before money leaves

Before acting, compare the proposed extra payment with a zero-extra case and a smaller or interrupted plan. Use the same starting balance, rate and dates in every case. A result is meaningful only when the payment remains affordable and the servicer accepts the assumed instruction.

Keep the Note, addenda, most recent statement and any written servicer answer with the calculation. If the loan is delinquent, in forbearance, under modification review or disputed, stop using a standard voluntary-prepayment scenario and obtain account-specific help.

• Keep the full required payment and essential bills funded first.
• Preserve accessible cash for repairs, taxes, insurance and income interruption.
• Verify the first extra amount on the next periodic statement.
• Rerun the estimate after a rate, payment, fee or servicing change.
• Use a dated servicer payoff statement for the actual final payment.