Refinance vs Prepayment — Which Strategy Saves You More Money?

How Each Strategy Works

Refinancing replaces your existing loan with a new one at a lower rate, reducing your monthly payment and total interest. Prepayment means sending extra money to principal, which shortens the loan term and reduces total interest without changing your rate.

When to Refinance

Refinance when: (1) rates have dropped at least 1% below your current rate, (2) you plan to stay in the home long enough to recoup closing costs (typically 3-5 years), (3) you want to change loan terms (e.g., 30-year to 15-year). The refinance calculator shows your break-even point.

When to Prepay

Prepay when: (1) your rate is already competitive and refinancing would not save enough, (2) you want flexibility (you can stop extra payments anytime), (3) you cannot justify refinance closing costs, (4) you have a short expected timeline and do not want refinance costs.

Hybrid Approach

Sometimes the best strategy is both: refinance to a lower rate AND make extra payments. The lower rate reduces your required payment, and sending that savings as extra principal accelerates your payoff even faster.