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Paying off a mortgage early, if doable, seems like the smartest plan in the world. But the question remains: Should you pay off your mortgage early? Dedicating most of your money to a home loan means you may not be able to fund your business, investments, a college fund, an emergency fund, travel, or fun purchases.

There are a lot of scenarios where your money may be put to better use elsewhere.

Here’s what to consider before you decide to go all-in on paying off your mortgage early.

When Should You Pay Off Your Mortgage Early?

Sometimes paying off your mortgage early could make sense. For example:

You Have a Rainy Day Fund

You have emergency savings, the three to six months of living expenses in reserve that most experts recommend.

And your college savings plan, if that’s a need, is funded.

You’re Funding Your Retirement

You’re contributing the max to your 401(k), IRA, and other retirement accounts. If that’s not the case, you may want to do that before paying off the mortgage.

You Want to Reduce Monthly Expenses Ahead of Retirement

If a mortgage takes up a large portion of your monthly expenses, it may make sense to eliminate the mortgage payment if you know you’re going to be on a limited income soon (such as retirement).

You Want to Save on Interest Costs

Take a look at the loan you signed, or any mortgage calculator tool for that matter. On many standard 30-year loans, you will pay just as much in interest as you do in principal. Paying off a home mortgage loan early could save you a lot of money in interest over the life of a home loan.

Reasons to Hold Off on Paying Off Your Mortgage Early

If you’re in the fortunate position of contemplating paying off your mortgage early, there are a few reasons to rethink doing so.

Investment Offers Possibility of Higher Return

If investments provide a return greater than the interest rate you’re paying on your mortgage, it may not make sense to pay off your home loan right now. Remember, past performance doesn’t guarantee future returns, so you’ll want to periodically evaluate how investments are performing against your mortgage interest rate. Many investments also have better liquidity than a mortgage. However, you’ll want to make sure to consider your risk tolerance and investment objectives when deciding to invest instead of paying down your mortgage.

What about buying a rental property instead of paying off a mortgage? Purchasing investment property could generate cash flow, and adding to a real estate portfolio is one way to build generational wealth.

You Still Have High-Interest Debt

Mortgages tend to have much lower interest rates than credit cards do. If you’re a “revolver” who carries balances from one month to the next, or in a family of revolvers, paying off that debt first makes sense.

Nearly half of U.S. families report having revolving balances on one or more of their credit cards, with the average revolving family owing over $6,000, recent data shows.

How to Pay Off Your Mortgage Early

If paying off your mortgage makes sense for your financial situation, it’s helpful to know how to pay off your mortgage early. A handful of strategies may work for different types of mortgages.

Biweekly or Extra Monthly Payment

One strategy homeowners use to pay off their mortgage early is to pay biweekly. If you pay every two weeks instead of monthly ($1,000 every two weeks, for example, instead of $2,000 a month), by the end of the year you’ll have made a full extra payment. Mortgage servicers may charge fees if you do this, though.

If you want to get more aggressive, making an extra payment every month will decrease the principal quickly. You’ll want to make sure the payment is applied to principal only.

Paying a bit extra every month is one sure way to shrink total interest paid and the loan term. For a mortgage loan of $450,000 at a 5.6% fixed rate for 30 years, total interest paid would be $480,008. Putting $400 more toward the mortgage payment every month would whittle total interest paid to $329,881 — a savings of $150,127. And the mortgage would be paid off in 21 years and 10 months instead of 30 years.

Refinance to a Shorter Term

Changing a 30-year mortgage to a 15-year term with a mortgage refinance will likely result in a larger monthly payment (depending on how much you owe) but a substantial amount in interest savings.

With a shorter mortgage term, payments eat into the principal more quickly. If you stack extra payments on top of a 15-year mortgage, you’ll quickly decrease your loan balance on your way to a paid-off mortgage. Refinancing doesn’t have to happen with your current lender, so consider shopping for a mortgage to see what rate and terms you can get if you are going this route.

Recast Your Mortgage

Recasting your mortgage involves making a large lump sum payment toward the principal and having your lender reamortize the mortgage. Your monthly mortgage payment will be recalculated based on how much you owe after the large payment. The term and interest rate will stay the same.

With a recast, you don’t have to go through the application process, and the administrative fee is usually a few hundred dollars.

To decide on a mortgage recast vs. refinance, weigh the pros and cons of each.

Make Lump-Sum Payments

Making lump sum payments will go far toward paying down your mortgage. Just make sure the payments go directly toward the principal.

Get a Loan Modification

A loan modification alters the terms of your original loan to make it more affordable, which could ultimately lead to an earlier mortgage payoff date. This mortgage relief option is reserved for those experiencing financial hardship.

Changes to the terms of the mortgage are designed to potentially lower the mortgage payment so that the homeowner avoids foreclosure. Talk to your lender if you’re thinking about going this route.

Recommended: Home Loan Help Center

The Takeaway

Paying off your mortgage early is a lofty goal, but if you have other financial needs or can make a better return elsewhere, it may make sense to keep your mortgage. Make sure you consider all options before you make your decision.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Do property taxes go up when you pay off your mortgage?

No. Property taxes do not change based on whether or not you’ve paid off your mortgage. If you do pay off your mortgage, it might seem like you’re paying more because you’ll pay taxes all at once or in a couple larger installments.

What happens to escrow when you pay off your mortgage?

When a mortgage is paid off, an escrow account, if one was in place, is closed. Homeowners will need to contact their property insurance company and taxing entity to have the charges sent directly to them. If there is extra money in the escrow account, it will be sent back to the homeowner when the mortgage is paid off and the escrow account is closed.

How does paying off your mortgage early affect your credit score?

Your credit score won’t be greatly affected by paying off your mortgage early. The account will remain on your credit for 10 years as a closed account in good standing.

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Paying off student loans can feel overwhelming, but with the right strategies, you may be able to negotiate a more manageable solution. Whether you’re struggling with payments or looking to settle your loan for less than the total amount owed, understanding the negotiation process can open up options you didn’t know were available.

Let’s look at how the student loan payoff process works. We’ll explore when negotiation might be a viable option, how to approach lenders, and tips for reaching a favorable agreement.

What Student Loan Settlement Is

While SoFi does not provide student loan settlement services, it’s important to understand how settlement works and when it may be an option for borrowers with other lenders. Student loan settlement refers to an agreement between the borrower and lender where the borrower pays a lump-sum amount that is less than the total balance owed to settle the debt. This option is generally available for borrowers who are in default or facing severe financial hardship.

You’ll go into default after a certain number of days, depending on your loan type (270 days for some federal loans; Perkins loans go into default immediately).

Defaulting on student loans can lead to several negative consequences, including:

•   Your entire unpaid loan balance becomes immediately due (called acceleration)

•   Tax refunds and federal benefit payments may be withheld to go toward your defaulted loan(s)

•   Garnished wages (your employer must withhold a portion of your pay to send to your loan holder)

•   No deferment or forbearance options available to you (more on these later)

•   Losing eligibility for other federal student loan benefits, including the ability to choose repayment plans

•   Losing eligibility for additional federal student aid

•   Damaging credit

•   Your loan holder taking you to court, which could result in court costs and collection and attorney’s fees

•   Withheld official college transcripts

How Student Loan Settlement Works

Settling loans can reduce what you owe and eliminate future repayment obligations. Here’s how it works in a nutshell:

1.    You negotiate with your loan servicer or a collections agency and offer to make a lump-sum payment.

2.    The loan servicer or collections agency agrees to the terms.

3.    You pay an amount lower than what you owe in outstanding loans, collection fees, and interest charges.

4.    The servicer or agency marks the debt as settled, and your loan obligation is satisfied.

5.    The default status comes off your credit report (but note that the settlement can still affect your credit).

How to Be Eligible for Student Loan Settlement

You can only qualify for a student loan payoff if your federal student loans are in default. If you have loans in good standing, you can’t qualify for a settlement request. It’s also important to note that federal student loan settlements are rare, because it’s difficult to get rid of student loans even if you go bankrupt.

You might also be able to negotiate a settlement with private student loans if you’re in default (which usually means you’re 120 days late on payments). Check with your lender for a definition of default on your particular private student loans.

Private student loan lenders cannot pursue the money owed them in the same way that federal loan servicers can, so they may be more likely to settle the loan(s).

Recommended: How to Get Student Loans Out of Default

Steps to Negotiating Student Loan Payoff

Can you negotiate student loan payoff? In other words, can you settle student loans?

Absolutely! Read on to learn the steps on how to settle student loan debt.

Step 1: Gather Your Documents

You must show that you can’t repay your student loans, which may include gathering the following:

•   Health records, such as your mental or physical illness diagnosis that makes it difficult for you to hold a job

•   Pay information, such as pay stubs, W-2 forms, and tax returns

•   Financial records, including information about a potential inheritance that could help pay your debts

•   Credit reports

Step 2: Contact the Agency and Negotiate Settlement Terms

Your loans typically go into collections after you go into default. You can call or email the collections agency, lender, or loan servicer and tell them you want to settle the debt by paying a portion of the total amount you owe. Describe the challenges you’re facing, such as financial challenges or medical problems.

Federal student loans often offer four settlement options:

•   Principal and interest: You only pay the outstanding principal and interest.

•   Principal and 50% interest: You pay the outstanding principal and 50% of interest, with collection costs waived.

•   90% principal and interest: You pay 90% of the outstanding principal and interest charges, with collection costs waived.

•   Discretionary compromise: You pay less than what you would owe under the other three standard options.

You may be able to settle private student loans for 40% to 70% of the amount you owe. Check with your lender or collection agency for more information.

Step 3: Review and Make Your Payment

You’ll receive a letter about your settlement terms. The letter will outline the amount you have to pay and the deadline. After you receive the letter, make your lump sum payment.

Note that if you don’t pay by the deadline, the agreement will be canceled and you’ll owe the total outstanding amount, interest, and fees. Keep track of all paperwork involved in the settlement.

Alternatives to Student Loan Settlement

Instead of opting for a loan settlement, consider repaying your loans in full. Repaying them in full may prevent you from having to go through loan repayment that could drag on for years. If you can’t repay them in full, consider deferment or forbearance, income-driven repayment plans, or student loan refinancing, which we’ll outline below.

Deferment or Forbearance

A student loan deferment or forbearance might be a good alternative to settlement. Here’s the definition of each:

•   Loan deferment: You temporarily stop making payments.

•   Loan forbearance: You stop making payments or reduce your monthly payments for up to 12 months.

It’s important to note that both are temporary situations and that you can accrue interest while your loan is in either forbearance or deferment.

Income-Driven Repayment Plan

An income-driven repayment (IDR) plan bases your monthly payments on your income and family size.

There is currently one income-driven repayment plan open to everyone: Income-Based Repayment (IBR). With this plan, borrowers typically pay 10-15% of their discretionary income, with payments adjusted annually. IBR plans offer loan forgiveness after 20-25 years of qualifying payments, depending on when the loans were issued. It’s a helpful option for those with high student loan debt compared to their income, ensuring payments remain affordable.

Note that there are two other income-driven repayment plans available — Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR). However, you must currently be enrolled in the Saving on a Valuable Education (SAVE) plan in order to apply.

Student Loan Refinancing

You may also consider refinancing your student loans instead of negotiating student loan debt. Student loan refinancing means a private lender pays off your existing federal or private student loan(s). A private lender might be a bank, online lender, or another type of financial institution. It’s worth shopping around for a private lender that offers a better:

•   Term

•   Interest rate

•   Monthly payment

Refinancing does have some downsides. You’ll lose access to federal repayment plans (such as the standard, graduated, and extended repayment plans, and income-driven plans) and Public Service Loan Forgiveness, and you’re no longer eligible for federal repayment protections or grace periods (where student loan payments haven’t yet started).

Also, it may not be possible to refinance student loans that are already in default. However, borrowers can rehabilitate or consolidate defaulted federal loans to regain eligibility for refinancing. Private loans in default may require negotiation with the lender before refinancing becomes an option.

Recommended: Does Refinancing Student Loans Save Money?

The Takeaway

While negotiating a student loan payoff is possible, it is often challenging to get approved. SoFi does not offer settlement options, but we provide alternatives like refinancing, deferment, and forbearance to help manage your student loan debt. It’s important to consider all your options.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQs

What are the benefits of student loan settlement?

The biggest benefit of student loan settlement is that you pay an amount lower than what you owe in loans, fees, and interest charges. Once you follow the settlement terms, your loan is settled and your obligation to pay the loan “goes away.” The default also gets removed from your credit report.

What are the downsides of student loan settlement?

The largest downside of student loan settlement is simply that they don’t happen that often. Federal loans are extremely difficult to discharge, even in bankruptcy. Student loan settlement can harm your credit score, as settled debts are reported as less than fully paid. Additionally, forgiven amounts may be considered taxable income, increasing your tax liability.

Will settling student loans hurt your credit score?

Yes, settling student loans can hurt your credit score. When a loan is settled for less than the full amount, it’s reported as “settled” rather than “paid in full,” indicating you didn’t meet your original repayment terms. This can negatively impact your credit history and future borrowing potential.

Photo credit: iStock/Jacob Wackerhausen

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Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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