If you’re a homeowner, your mortgage is likely one of your biggest financial commitments. So, the idea of paying it off faster and becoming debt-free sooner is understandably appealing. But is refinancing the right way to do it? And more importantly, is it better to refinance or pay off early?
With interest rates constantly shifting and various financial strategies to consider, refinancing your mortgage can either be a smart move or an expensive mistake. Before you rush into a new loan agreement, let’s explore the pros and cons of refinancing to pay off your mortgage sooner.
Why Consider Refinancing to Pay Off Your Mortgage Faster?
Many homeowners refinance because they’re after a lower interest rate, which can reduce monthly repayments or allow them to switch from a 30-year mortgage to a 15-year term. Others want to tap into home equity or move from a variable rate to a fixed rate for stability.
But when the goal is to pay off your mortgage sooner, the key question is:
- Will refinancing actually help, or are there better ways to achieve the same goal?
- Are there any risks that might make refinancing a bad financial move?
To answer these questions, we need to weigh up the advantages and potential pitfalls of refinancing for an early mortgage payoff.
Pros of Refinancing to Pay Off Your Mortgage Early
Refinancing can be a useful strategy for homeowners looking to pay off their mortgage sooner. Here are some ways it might help:
1. Lower Interest Rates = Faster Payoff
A lower interest rate doesn’t just reduce your repayments. It also changes how quickly your loan balance shrinks. Even a 1% lower interest rate can save you tens of thousands over the life of your loan due to how interest adds up over time.
The key? Use those savings to make extra repayments rather than just enjoying lower monthly payments.
For example, if you refinance from a 6% interest rate to 4%, your monthly repayments decrease, and you can redirect the savings toward extra repayments on your loan.
2. Shorter Loan Term Saves Thousands in Interest
A 30-year mortgage might feel manageable, but over time, you pay a fortune in interest. Refinancing to a 15-year loan increases your monthly payment but dramatically reduces the total interest paid.
For instance, on a $400,000 loan at 5% interest:
- 30-year term: $373,023 in total interest
- 15-year term: $169,865 in total interest
That’s over $200,000 in savings! If your budget allows for higher monthly repayments, refinancing into a shorter-term loan could be an excellent move.
3. More Financial Discipline
Many people intend to make extra repayments, but life happens. Unexpected expenses, lifestyle changes, or even a lack of discipline can get in the way.
By locking yourself into a 15-year loan, you commit to higher monthly repayments. This ensures that your mortgage is paid off on schedule without relying on self-discipline to make extra voluntary payments.
💡 Pro Tip: If you’re considering refinancing to a shorter term, make sure you have an emergency fund in place. A financial cushion ensures that if unexpected costs arise, you won’t struggle to keep up with your higher mortgage repayments.
4. Switching to a Fixed Rate for Stability
If you’re on a variable-rate loan, you might worry about future interest rate hikes. Refinancing to a fixed-rate mortgage keeps your repayments the same, making it easier to budget and stay on track with paying off your home.
For homeowners who want certainty in their monthly payments, this can be a great way to stay on track toward paying off your home early.
The Downsides of Refinancing to Pay Off Your Mortgage Faster
Despite its advantages, refinancing isn’t always the right choice. Here are some potential drawbacks to keep in mind:
1. Refinancing Isn’t Free – Watch for Hidden Costs
One of the biggest mistakes homeowners make is focusing only on the lower interest rate and ignoring the fees. Typical refinancing costs include:
✔️ Application fees – Can range from $300 to $1,000
✔️ Valuation fees – $200 to $600, depending on your lender
✔️ Lender’s Mortgage Insurance (LMI) – If refinancing with less than 20% equity
✔️ Break costs – If you’re exiting a fixed loan early, this can be thousands
Refinancing comes with fees, so it’s important to check if the money you’ll save is worth the cost.
💡 Pro Tip: Always calculate the break-even point. This is the time it takes for your refinancing savings to cover the upfront costs. If you plan to move in a few years, refinancing may not be worth it.
2. At What Point Is It Not Worth It to Refinance?
Refinancing isn’t always a smart move, particularly in these cases:
❌ If you have less than 5-7 years left on your loan, refinancing can reset your term, meaning you may end up paying more in interest over time. Instead of refinancing, consider increasing extra repayments on your existing loan.
❌ If your mortgage balance is below $100,000, lenders may not offer competitive rates, making refinancing less cost-effective.
❌ If you plan to sell in 2-3 years, you might not break even on the refinancing costs before moving.
💡 Pro Tip: To see if refinancing makes sense, calculate the break-even period. This is the number of months it takes to save from a lower rate to offset refinancing costs. If you won’t stay in the home that long, refinancing isn’t worth it.
3. Higher Monthly Payments Could Strain Your Budget
While a shorter loan term helps you pay off your home faster, higher repayments could put pressure on your finances.
For example, refinancing a $400,000 mortgage from a 30-year term ($2,147/month) to a 15-year term ($3,162/month) increases repayments by over $1,000 per month.
Before committing to higher repayments, ask yourself:
✔️ Do I have a stable income to support this?
✔️ Do I have a financial buffer for unexpected expenses?
✔️ Am I comfortable reducing my monthly cash flow flexibility?
Should I Refinance or Just Make Extra Payments?
Many homeowners assume that refinancing is the only way to pay off their mortgage faster, but that’s not always the case. Sometimes, simply making extra repayments on your existing loan can achieve the same goal without incurring refinancing fees or resetting your loan term.
Let’s compare the two approaches:
Refinancing vs. Extra Repayments – What’s Better?
| Factor | Refinancing | Making Extra Repayments |
| Interest Savings | Saves money by securing a lower interest rate | Saves money by reducing loan principal faster |
| Fees Involved | High (application, valuation, break fees, LMI) | None |
| Flexibility | Less flexible – locked into higher repayments | Highly flexible – you control extra repayments |
| Time to Implement | Takes weeks to process | Immediate (just start paying more) |
| Best For | Those with high interest rates who can commit to higher repayments | Those with a good rate who want to avoid fees |
💡 Key Insight: If you already have a competitive interest rate, refinancing may not be necessary. Instead, just increasing extra payments can help you pay off your loan faster without the extra costs of refinancing.
Alternative Ways to Pay Off Your Mortgage Faster (Without Refinancing)
If refinancing doesn’t make financial sense, there are other ways to accelerate your mortgage payoff without going through the hassle of a new loan.
1. Make Extra Repayments (Even Small Ones Count!)
Paying just $100 extra each month can reduce your loan term by years and save you thousands in interest.
For example: On a $500,000 loan at 4% interest over 30 years, just an extra $100 per month saves $38,000 in interest and reduces the loan term by nearly 5 years.
2. Use an Offset Account to Reduce Interest
An offset account works like a regular bank account, but instead of earning interest, it reduces the interest on your mortgage.
If you have $50,000 in an offset account against a $400,000 mortgage, you only pay interest on $350,000—saving you thousands over the life of your loan.
3. Increase Repayment Frequency
Switching from monthly to fortnightly repayments adds one extra payment per year. Over time, this small change can cut years off your mortgage.
For example:
- Monthly payments: 12 per year
- Fortnightly payments: 26 per year (equivalent to 13 full payments!)
4. Round Up Your Payments
If your mortgage repayment is $1,850 per month, rounding it up to $2,000 adds an extra $150 per month. This simple trick could save you tens of thousands in interest over time.
So, Should You Refinance to Pay Off Your Mortgage Faster?
The answer depends on your goals, financial situation, and current loan terms.
✔️ If you can secure a lower interest rate, avoid excessive fees, and afford higher repayments, refinancing to a shorter loan term could be a great way to save on interest and become mortgage-free sooner.
❌ However, if refinancing costs outweigh the benefits, or if you have better ways to use your extra cash (like investing), sticking with your current loan and making extra repayments might be the smarter option.
Final Takeaway: Know Your Numbers Before You Refinance
Before making any decisions, ask yourself:
- What is the downside of refinancing your mortgage?
- At what point is it not worth it to refinance?
- Is there a downside to paying off a mortgage early?
Do the math, explore your options, and seek guidance from a reliable mortgage broker or financial expert. If refinancing makes sense for you, it could be a powerful tool to help you reach financial freedom faster.
Frequently Asked Questions (FAQs)
1. How do I know if refinancing is the right move for me?
Refinancing makes sense when it helps you save on interest, reduce your loan term, or access better loan features. However, it’s not always beneficial, especially when considering refinancing costs and how long you plan to stay in your home. A mortgage broker can compare loan options and see if refinancing is the right fit for your financial situation.
2. What fees should I consider before refinancing?
Refinancing comes with several costs, including application fees, valuation fees, break costs (if exiting a fixed loan), and possibly lender’s mortgage insurance (LMI). The total cost varies depending on your lender and loan terms. If you want a clearer breakdown of what refinancing might cost in your situation, a finance broker can provide insights based on current market conditions.
3. Can I refinance if my credit score isn’t perfect?
Lenders generally prefer borrowers with strong credit scores, but refinancing is still possible even if your credit isn’t ideal. Some lenders provide refinancing options for borrowers with lower credit scores or unique financial situations. If you’re unsure where you stand, a mortgage broker can help explore alternative lenders and refinancing solutions that fit your profile.
4. Is refinancing always better than making extra repayments?
Refinancing can reduce your interest rate and shorten your loan term, while extra repayments help you pay off your current loan faster without changing its terms. The right choice depends on your financial situation and goals. If you’re deciding between the two, a mortgage broker can help compare the numbers and determine the most cost-effective approach.
5. How can I find the best refinancing deal without spending hours researching lenders?
Interest rates, loan terms, and features vary across lenders, making it difficult to compare options on your own. Mortgage brokers can access multiple lenders and find refinancing deals that match your needs, helping you save time and secure a competitive rate.
