Question: To get savings, is it better to prepay or refinance my mortgage?
A: The process isn't that complicated, but you will need to run some numbers on an amortization calculator which can handle prepayments from where ever you are in your existing mortgage's amortization term. HSH.com has a downloadable calculator called the Homebuyer's Calculator Suite which allows for this.
If you have a specific end-date you would like for your mortgage, you can use HSH.com's "It's My Term" calculator--you tell us the term, we'll tell you the amount of the prepayment needed to hit the goal, as well as how much interest you'll save.
Back to your question: Use the calculator to run the amortization for your loan. Take a note of how much interest you will pay over the entire term. Then, determine how much additional monthly payment you can send, and add that in starting with the month you desire, and then recalculate. Now re-check the total interest cost for your prepaid loan, and see how much interest you will save, and how much shorter the term will be.
A different method would have you plug in numbers for the loan as though you are refinancing to a new mortgage. Run the amortization as above and determine how much principal remains to be paid and the remaining term and jot them down somewhere. Then, clear out the calculator, and add in the remaining principal from above as the new loan amount, add in new interest rate and new term, and then calculate. You can then compare the total interest cost and term of the refinanced loan below against that from the pre-paid loan above to see what will save you the most money.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.