Pay Off Mortgage Early vs Refinancing

by Cynthia G from Delray Beach, Florida USA

Which is best? Pay off your mortgage early vs refinancing: Hello Kate, I have 4.10 years left on my 15 year mortgage at 6.5%. The remaining loan amount that I need to pay off is $42,000. My bank is offering me a HARP loan, refinance to 3.5% for 15 years. This doesn't make sense to me to add 10 years of extra payments for a lower monthly payment.


Cynthia continues... Obviously, I'll be paying more in the long run in interest.

If I paid the new loan off in 5 years anyway (for there is no prepayment penalty) would I be ahead? I am thinking also to take $15,000 from my savings, add to the existing principal of my current loan thus, lowering my principal balance and mortgage payment.

Financial Wizards that I know are convinced that I should re-fi with my bank. I am no Financial Brain but it just doesn't make sense to me logically! Thoughts please! Thanks!!! Cynthia

Kate Answers: Pay Off Mortgage Early vs Refinancing

***zz-portrait-left.shtml*** Dear Cynthia,

Refinancing a mortgage does not always make financial sense.

Because more of the monthly payment goes to interest, a homeowner gets less principal reduction during the earlier years of a term.

That's why, Financial Brain or not, you are smart to question the benefits of refinancing since you are in the last 5 years of your term.

Compare Current Mortgage to Refinancing

Now, you didn't mention how much you originally borrowed on your current mortgage but I'd guess about $100,000.

That means you may have less than $8,000 left to pay in interest after having paid approximately $49,000. (15 years at 6.5% equals $100,000 principal payments and $57,000 interest payments.)
It is important to understand these calculations, comparisons, and savings are rough figures because I am estimating your original loan amount. Property taxes, homeowners insurance, and PMI are not included in estimated payments.
However if you start over by refinancing $42,000 at 3.5%, you'll pay $12,000 in interest payments over the following 15 years. Decreasing the benefit further, no mortgage refinancing costs, financed or paid in cash, have been taken into account.

But flipping the pancake, your monthly principal and interest house payment would fall to $300. So if an affordable mortgage payment is your goal, refinancing may be worthwhile.

Let's look at other refinancing scenarios.

Accelerate Mortgage Pay-Off by Refinancing and Increasing Payment

You also asked about refinancing for 15 years but accelerating to a 5 year pay-off by increasing your mortgage payments. Your monthly principal and interest payments would increase to approximately $800, but get this! The total interest paid would drop to about $4000.

Keep in mind that financing mortgage closing costs will eat up some benefit. Overall though, not bad!

Early Mortgage Pay-Off by Decreasing Principal Loan Balance

***zz-portrait-left-the-mortgage-freedom-project.shtml*** However, let's go back to keeping your current mortgage. What if you went ahead and paid down your principal balance by $15,000 instead of refinancing?

The remaining term would be shortened by almost 2 years, you'd save $4500 in interest payments, and the hassle of refinancing!

While we are on the subject, let me mention this. I have developed a 6-step procedure to getting out of debt and paying off your house early, starting with $15. I call it Kate's 6-Step Magical System! Don't miss it!

Now for one last thought. Is refinancing a small mortgage worthwhile? What if you reduced your principal balance by $15,000 and refinanced a minimal loan amount of $27,000? I doubt there would be much benefit because fees of a fixed amount are easily disproportionate to such a small loan amount.

Talk it over with your loan originator but trust your gut!
It is crucial to instruct a loan servicer to apply a lump sum payment to principal reduction. Otherwise, your one-time payment could be applied to future house payments.

How to Calculate Your House Payments

Did you know you can calculate monthly mortgage payments and compare different options right here at It's easy! Go to my House Payment Calculator and start with the tutorial. You'll be calculating your house payments and comparing savings just like the pros!

Is Mortgage Refinancing Worth the Cost

Other ways to compare mortgage refinancing are found at
1. How to Compare Mortgages
2. Mortgage Refi Tips and Answers
3. Best Fixed Rate Mortgage Tips

Good luck and best wishes,


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Got questions? You are invited to ask Kate for answers. Or post a quick comment or related question by clicking the link near the bottom of this page. ***zzz-link-harp-news.shtml*** ***zz-newsletter.shtml***

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Mortgage Calculator Pay Off Early Feature
by: Kate

Hi Cynthia, Use my calculator to see how early you will pay off your home loan by making extra payments. It's simple!

Go to my Mortgage Payment Calculator. This window will stay open so you can return to read directions.

Enter your original mortgage amount, term, and interest rate. (Example, $100,000, 15 years, 6.5 percent.)

Continue to "Prepayments" and enter:

1. Type: How often you want to make an extra payment - monthly, yearly, or one-time payment? (In your case, one-time payment)

2. Amount: How much extra? (In your case, $15,000)

3. Start with payment: This is the month during your loan that you begin making extra payments. (In your case, 120 which is the 120th month in the 15 year term)

See how much interest you save by making extra payments? (In your case, $4561)

Want to know how early your mortgage will now pay off? Click "View Report" and see that your loan pays off 1 year and 10 months early!

Best wishes, Kate

Click here to add your own comment.

You can also ask Kate about your mortgage at Refinancing Advice The Nuts and Bolts.

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