by Moe Zilla

Created on: July 16, 2010

It's impossible to calculate the answer to this question mathematically. To get an exact answer, you'd first need to know the dollar amount of the extra payments. If the extra payments were extremely large, you could pay off your mortgage much earlier and avoid incurring many months of hefty interest fees. But you can accomplish the same level of savings by simply refinancing the mortgage - and if you do some careful shopping, the terms of your new mortgage agreement could save you even more money!

In 2008 there was a major shake-up in the banking industry, so there's now a lot of new programs designed to help homeowners. The federal governments wants the banks to succeed, and it wants to see fewer defaults on home loans. In fact, in the last two years the government made hundreds of millions of dollars available to banks at no-cost interest rates, in the hope of improving the economy. This means that banks now have a huge new influx of cash, and it's waiting there now to provide you with a good opportunity to refinance your mortgage.

There's even some free advice for how to get the best deal that's available from the Federal Reserve Board. For example, they suggest that you might get a good deal from the bank that originated your loan, because "That lender may want to keep your business, and may be willing to reduce or eliminate some of the typical refinancing fees." They also note that your current lender may skip the redundant title search or the home inspection and surveys - or simply avoid charging you the usual application or origination fees. Starting with your original lender may end up getting you a better deal, and that's even before you start comparison shopping at competing institutions!

In theory you can accomplish everything with a mortgage refinancing that you could with extra payments. In both cases you're taking the total debt amount, and then re-arranging the schedule on which it's paid. But obviously, the biggest problem with extra mortgage payments is you have to come up with the money! By refinancing a mortgage, you can often extend the payback period. This alone allows you to make other investments with the money you're saving, and with a higher rate of return, you can pay down the mortgage more quickly. But with a careful refinancing, you might also discover that you're saving so much money, it's better than busting your back trying to pay down your original loan.

The best argument for a mortgage refinance is that it's an automatic savings which happens every month. (So why pay more when you don't have to?) And that's also probably the best argument against making extra payments. It seems like a good idea, but it's impossible to sustain. So eventually you'll have to come up with a new solution anyways!

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