Refinancing vs Extra Payments: Which Strategy Saves More on Your Mortgage?

If you are looking to save money on your mortgage, two strategies come up more than any other: refinancing to a lower interest rate and making extra payments toward your principal. Both can save you tens of thousands of dollars and shave years off your loan. But they work in very different ways, carry different costs and risks, and the right choice depends heavily on your specific situation.

In this guide, we will break down both strategies with real numbers on a $300,000 mortgage, walk through the break-even calculation for refinancing, compare the long-term savings side by side, explore tax implications, and show you how a hybrid approach can maximize your results. By the end, you will know exactly which strategy—or combination of strategies—makes sense for your mortgage.

How Refinancing Works

Refinancing means replacing your current mortgage with a brand-new loan, typically at a lower interest rate. When you refinance, your existing loan is paid off and a new loan is created with new terms. You can change your interest rate, your loan term, or both.

The primary goal of a rate-and-term refinance is to reduce the interest rate you pay, which lowers your monthly payment, reduces total interest over the life of the loan, or both. However, refinancing is not free. It comes with closing costs that typically range from 2% to 5% of the loan amount, or roughly $6,000 to $15,000 on a $300,000 mortgage.

Common closing costs include:

• Origination fee: 0.5% to 1% of the loan amount
• Appraisal fee: $300 to $600
• Title insurance and search: $500 to $1,500
• Recording fees: $50 to $250
• Credit report fee: $25 to $50
• Prepaid interest, taxes, and insurance escrow adjustments

These costs must be factored into any refinancing decision. If you do not stay in the home long enough to recoup these costs through monthly savings, refinancing can actually cost you money.

The Break-Even Calculation

The break-even point is the most important number in any refinancing decision. It tells you how many months you need to keep the new mortgage before the monthly savings exceed the closing costs you paid.

Let us calculate this for a real scenario. Suppose you have a $300,000 mortgage at 7.0% with 27 years remaining. Your current monthly payment is approximately $1,996. You are offered a refinance at 5.75% with $8,500 in closing costs and a new 30-year term.

The new monthly payment on $300,000 at 5.75% over 30 years would be approximately $1,751. That is a monthly savings of $245.

Break-even = $8,500 / $245 = 34.7 months (about 2 years and 11 months).

If you plan to stay in the home for at least 3 years, this refinance makes sense from a pure payment perspective. But there is more to consider, including the fact that you are resetting the clock on a 30-year term.

How Extra Payments Work

Making extra payments is simpler and has zero transaction costs. You simply pay more than the minimum required each month (or make additional lump-sum payments), and the extra amount goes directly toward reducing your principal balance.

Because mortgage interest is calculated on the outstanding balance, every dollar of extra principal you pay reduces the interest that accrues in every subsequent period. This creates a compounding effect: early extra payments save the most because they prevent interest from accumulating across the entire remaining life of the loan.

The 1% Rule

A popular guideline is the 1% rule: adding just 1% of your original loan amount as an extra monthly payment can dramatically accelerate your payoff. On a $300,000 mortgage, that means adding $250 per month to your regular payment.

This simple habit can cut 5 to 7 years off a 30-year mortgage and save you $50,000 to $80,000 in interest, depending on your rate. No closing costs, no paperwork, no credit checks. You can start and stop at any time based on your financial situation.

Comparing Scenarios with Real Numbers

Let us compare both strategies head to head using a $300,000, 30-year fixed mortgage. We will examine three rate environments to show how the math changes.

Scenario 1: Current Rate 7.0%, Refinance to 5.75%

Metric	Refinance to 5.75%	Extra $250/month at 7.0%
Monthly payment	$1,751	$1,996 + $250 = $2,246
Closing costs	$8,500	$0
Payoff time	30 years (new term)	22 years, 6 months
Total interest paid	$330,360	$302,140
Total cost (interest + closing)	$338,860	$302,140
Net savings vs original	$79,773	$116,493

In this scenario, extra payments win decisively. Even though refinancing lowers the rate by 1.25%, resetting to a new 30-year term and paying closing costs undermines the savings. Meanwhile, extra payments aggressively attack the principal and pay off the loan 7.5 years early.

Scenario 2: Current Rate 7.0%, Refinance to 5.75% (Same Remaining Term)

What if you refinance but keep paying the same amount as your old payment ($1,996) instead of the new minimum ($1,751)? The extra $245 per month goes to principal.

Metric	Refi + Pay Old Amount	Extra $250/month at 7.0%
Monthly out-of-pocket	$1,996	$2,246
Closing costs	$8,500	$0
Payoff time	23 years, 2 months	22 years, 6 months
Total interest paid	$237,480	$302,140
Total cost (interest + closing)	$245,980	$302,140
Net savings vs original	$172,653	$116,493

Now the picture changes dramatically. By refinancing and continuing to pay the old monthly amount, you get the benefit of a lower rate plus built-in extra payments. This hybrid approach saves over $172,000 versus the original mortgage—nearly $56,000 more than extra payments alone.

Scenario 3: Current Rate 6.5%, Refinance to 5.75%

Metric	Refi to 5.75% (new 30yr)	Extra $250/month at 6.5%
Monthly payment	$1,751	$1,896 + $250 = $2,146
Closing costs	$8,500	$0
Payoff time	30 years (new term)	22 years, 10 months
Total interest paid	$330,360	$268,430
Total cost (interest + closing)	$338,860	$268,430
Net savings vs original	$43,773	$114,203

With only a 0.75% rate difference, refinancing to a new 30-year term barely saves anything compared to extra payments. The closing costs and extended term eat most of the rate reduction. Extra payments are the clear winner here.

When Refinancing Makes Sense

Refinancing is generally worth considering when the following conditions are met:

• The rate difference is at least 1% to 1.5%: A larger rate drop means faster break-even and more total savings.
• You plan to stay in the home past the break-even point: If you might move within a few years, the closing costs may not be recovered.
• Your credit score has improved significantly: A higher credit score qualifies you for better rates than when you originally took out the loan.
• Your home has appreciated: More equity means better loan-to-value ratios, which can qualify you for lower rates and eliminate PMI.
• You want to shorten your loan term: Refinancing from a 30-year to a 15-year mortgage often comes with a lower rate and builds equity much faster.
• You need to lower your monthly payment: If cash flow is tight, refinancing to a lower rate reduces your minimum required payment, providing financial breathing room.

When Extra Payments Make More Sense

Extra payments are the better choice in these situations:

• The rate difference is small (under 1%): Closing costs will eat up most of the savings from a small rate reduction.
• You may move within a few years: Extra payments provide immediate equity with no sunk costs.
• You want flexibility: Extra payments can be increased, decreased, or paused at any time with no penalty. Refinancing locks you into new terms.
• You do not want to reset your loan term: If you have already paid several years on your mortgage, refinancing to a new 30-year term feels like moving backward.
• Your mortgage balance is relatively small: On smaller balances, closing costs represent a larger percentage of the loan, making refinancing less efficient.
• You value simplicity: No applications, no appraisals, no underwriting. You just send extra money with your payment.

Tax Implications to Consider

Both strategies have tax considerations that can affect your decision:

Mortgage Interest Deduction

If you itemize deductions, mortgage interest is tax-deductible on the first $750,000 of mortgage debt (for loans originated after December 15, 2017). Both refinancing and extra payments reduce the interest you pay over time, which means your deduction decreases as well. However, you should never avoid saving on interest just to preserve a tax deduction—the deduction is worth less than the interest you are paying.

Refinancing Points

If you pay discount points when refinancing (each point equals 1% of the loan amount and typically reduces the rate by about 0.25%), those points are tax-deductible. However, unlike points on a purchase mortgage, refinancing points must be amortized over the life of the loan rather than deducted in the year they are paid.

Standard Deduction Consideration

With the standard deduction at $15,000 for single filers and $30,000 for married filing jointly in 2026, many homeowners no longer itemize. If you take the standard deduction, the mortgage interest deduction is irrelevant to your decision. Focus purely on the total cost comparison between the two strategies.

Pros and Cons at a Glance

Refinancing: Pros

• Can significantly lower your monthly payment and total interest
• Locks in a new, lower rate for the remaining life of the loan
• Opportunity to change loan term (e.g., 30-year to 15-year)
• Can eliminate PMI if you have gained sufficient equity
• Monthly savings happen automatically with no ongoing effort

Refinancing: Cons

• Upfront closing costs of $6,000 to $15,000
• Resets the amortization clock if you extend the term
• Requires credit check, appraisal, and underwriting process
• Takes 30 to 60 days to close
• Not beneficial if you plan to move soon
• Points and fees can be confusing to evaluate

Extra Payments: Pros

• Zero cost to implement—no fees, no closing costs
• Complete flexibility to start, stop, or adjust anytime
• Immediate impact on principal and interest savings
• No credit check or application process
• Builds equity faster without resetting the loan term
• Works regardless of current interest rate environment

Extra Payments: Cons

• Requires ongoing financial discipline
• Tied-up capital is illiquid (you cannot easily access equity without selling or taking a HELOC)
• Does not change the interest rate on existing debt
• Opportunity cost if investment returns exceed your mortgage rate
• Some lenders may apply extra payments to future payments rather than principal (you must specify)

The Hybrid Strategy: Refinance Then Make Extra Payments

As our Scenario 2 demonstrated, the most powerful approach is often a hybrid strategy: refinance to a lower rate, then continue making payments at or above your old payment amount. This gives you the benefit of a lower interest rate and the accelerated payoff of extra payments.

Here is how to execute this strategy:

1. Refinance when the rate drop justifies the closing costs. Use the break-even formula to ensure you will stay in the home long enough.
2. Keep paying your old monthly payment amount. The difference between your old and new payment automatically becomes an extra principal payment each month.
3. Consider adding even more. If your budget allows, add additional principal payments on top of your old payment amount for maximum acceleration.
4. Monitor your amortization schedule. Use a payoff calculator to track your progress and see how much time and interest you are saving.

Using our example: refinancing from 7.0% to 5.75% and continuing to pay $1,996 (the old payment) instead of the new minimum of $1,751 saves over $172,000 in interest and pays off the mortgage in about 23 years instead of 30. If you added another $250 per month on top of that, the payoff drops to roughly 19 years with even greater savings.

Decision Framework: Which Should You Choose?

To simplify the decision, ask yourself these questions:

1. Is the available refinance rate at least 1% lower than your current rate? If yes, refinancing is worth investigating. If the drop is less than 0.75%, extra payments are likely better.
2. How long will you stay in the home? Calculate the break-even point. If you will move before reaching it, skip refinancing and make extra payments instead.
3. Do you have the cash for closing costs? If paying closing costs would deplete your emergency fund or prevent you from making extra payments, it may be better to focus on extra payments alone.
4. Do you have the discipline for ongoing extra payments? If you are likely to spend the "savings" from a lower payment, refinancing at least locks in some benefit automatically. Extra payments require consistent follow-through.
5. What is your overall financial picture? If you carry high-interest debt (credit cards, personal loans), pay that off before either strategy. The guaranteed return from eliminating 20%+ interest debt far exceeds mortgage savings.

Run the Numbers for Your Mortgage

Every mortgage is unique. The right strategy depends on your specific balance, rate, remaining term, local closing costs, and how long you plan to stay in the home. Our free mortgage payoff calculator lets you model both extra payments and different rate scenarios to see exactly how each approach affects your payoff timeline and total interest.

Enter your current loan details, then experiment with extra monthly payments to see the impact. Compare that to the savings from a potential refinance at today's rates. The calculator shows you a month-by-month amortization schedule so you can see precisely where your money goes under each scenario.