Answer Desk: Refinance or pay the principal down?

Run the numbers before refinancing. (WTOP File Photo)

Darci Marchese,

WASHINGTON – You’ve been hearing about historically low interest rates for many months now, so you may be wondering whether it’s best to refinance or pay the principal down instead.

While there are a number of variables, the WTOP Answer Desk takes a look at the general guidelines. Of course, it all comes down to your situation.

Steve Cohen of First Place Bank says think of it this way: If you have a hefty loan, worth hundreds of thousands, refinancing can save you a lot. The larger the loan, the more you stand to gain by lowering your interest rate.

You have to consider many factors, including how long you’ll be in the home and how closing costs will figure in to your bottom line. However, Cohen says there are no-cost loans, so ask your lender about them.

If you’re underwater, and have a Freddie Mac or Fannie Mae backed loan, you can still refinance if you’re a bit upside down. Your loan needs to be 125 percent of the value of your loan.

If your loan is not backed by Freddie or Fannie, Cohen says don’t bother. Being upside down will prevent you from being able to refinance.

Also, count on an appraisal if you’re going to refinance.

Paying down the principal is a great way to save a lot of cash. Extra payments will go toward principal which will lower next month’s interest portion of what is owed. explains the interest component of your monthly mortgage payment is based on the loan balance. A lower loan means a lower monthly interest payment.

You can use an amortization calculator to help you determine what the best options are for your situation.

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