Many people probably wonder which is better: extra payments or mortgage refinancing? Although the two choices affect each other, a decision for making extra payments or mortgage refinancing should be considered independently, as they are based on different factors.
Extra payments can be a form of investment. The primary benefit for extra payments is to get out of debt faster. The faster you finish paying your mortgage, the less your interest costs and the more you save in the long term.
Mortgage refinancing, on the other hand, won’t necessarily decrease your loan term. Mortgage refinancing is more concerned with reducing rates and monthly payments, or converting your adjustable rate mortgage (ARM) into a fixed rate. Your priorities in mortgage refinancing will depend on your current situation with monthly payments or your interest rate. If you’re struggling to make monthly payments, you can refinance to reduce your monthly payments, usually increasing the loan term. But with a longer loan term, a higher interest cost is expected. You can also refinance and reduce interest rates, which can shorten the loan term – but your monthly payments can go up. Whichever you choose, your goal is to save money in the long run.
Which is better?
Extra payments will save you from interest costs, though your savings is dependent on the speed at which you pay your mortgage.
The drawback is that not everyone has the money to pay extra. In addition, if your mortgage is an ARM, extra payments won’t save you from the risk of fluctuating and increasing interest rates. If your mortgage is an ARM, mortgage refinancing could be more beneficial.
Do your homework and calculate carefully different scenarios before refinancing loans. Be sure to check if your mortgage has prepayment penalties. If it does, you have to wait until the prepayment penalty has expired before refinancing loans.
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[...] case you’ve already locked into a variable-rate, perhaps it’s time to renegotiate and modify your mortgage loan. Even if it takes more time to pay, unless you’re planning a job-related move anytime soon, [...]
Posted on January 27th, 2010 at 7:50 am