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Paying off your mortgage ahead of time might sound like an incredibly savvy thing to do — and in some cases, it is. But it’s not the right money move for everyone. And paying off a mortgage in just five years? It’s an aggressive strategy that may or may not be the smartest choice.

Benefits and Risks of Paying Off a Mortgage Early

Achieving homeownership is, well, an achievement. And since you’re here reading an article about paying a mortgage off early, you’re clearly an overachiever.

Paying off any kind of debt early usually seems advisable. But for most of us, our home is the single largest purchase we’ll ever make — and paying off a six-figure loan in only a few years could wreak havoc on the rest of your finances.

In addition, some mortgages come with a prepayment penalty, which means you could be on the line for additional fees that might eclipse whatever you’d stand to save in interest payments over time. (Mortgages tend to have lower interest rates than many other common types of debt anyway.)

That said, if you have the cash, paying off your home early can lead to substantial savings, not to mention helping you build home equity as quickly as possible.

Let’s take a closer look at the risks and benefits of paying off a mortgage early.

Benefits of Paying Off a Mortgage Early

The main benefit of paying off a mortgage early is getting out of debt. Even minimal interest is an expense it can be nice to avoid.

Additionally, paying off your home early means you’ll have 100% equity in your home, meaning you own its whole value, which can be a major boon to your net worth.


💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.

Risks of Paying Off a Mortgage Early

Paying off a mortgage early may come with risks, and not just prepayment penalties (which we’ll touch on again in a moment). In many instances, it can be a plain old bad financial move.

Depending on what your cash flow situation looks like, and what the interest rate on your mortgage is, you might stand to out-earn early payoff savings if you funnel the extra cash to your investment or retirement accounts instead. (You can use this mortgage calculator to see how much interest you stand to pay over the lifetime of your home loan — and then compare that to how much you might earn if you invested that money instead.)

Additionally, if you have other forms of high-interest debt, like revolving credit card balances, it’s almost always a better idea to focus your financial efforts on those pay-down projects instead.

“No matter what method works best for you, it’s important to cut spending as much as you can while you’re tackling your debts,” said Kendall Meade, a Certified Financial Planner at SoFi.

And if you have historically taken the home mortgage interest deduction on your taxes, it’s also worth talking with your tax advisor about what impact paying off your mortgage early will have on your deductions. (For 2023, the standard deduction is $27,700 for married couples filing jointly and $13,850 for single people and married people filing separately. For 2024, the standard deduction for married couples filing jointly rises to $29,200. For single taxpayers and married people filing separately, the standard deduction rises to $14,600.)

To recap:

Benefits of Paying Off a Mortgage Early	Risks of Paying Off a Mortgage Early
Saving money on interest over time	Possible repayment penalty; possible loss of tax deduction
Building home equity quickly	Lost opportunity for investment growth, which could outweigh interest savings
No longer having to make a mortgage payment every month	Less money for other important goals, such as paying down credit card debt

Watching Out for Prepayment Fees

One of the biggest risks of paying off a mortgage before its full term is up is the potential to run into prepayment penalties. Some mortgage lenders charge large fees to make up for the interest they’ll be missing out on.

Fortunately, avoiding prepayment penalties on home loans written after 2014 is easier: Legislation was passed to restrict lenders’ ability to charge those fees. But if your mortgage was written in 2013 or earlier — and even if not — it’s a good idea to read the fine print before you hit “submit” on your lump-sum payment, and ideally before you accept the contract at all.

Steps to Paying Off a Mortgage Early

You’ve assessed the risks and benefits and decided that paying off the mortgage early is the right move for you. Nice!

Now let’s take a look at how to get it done.

Pregame: Considering Repayment Goals When House Shopping

This option won’t work if you’ve already found and moved into a home, but if you’re still in the home-shopping portion of the journey, looking at inexpensive homes can be a great first step toward paying off your mortgage fast.

After all, if the home has a lower price tag, it’ll be easier to reach that goal in a shorter amount of time. Ideally, you want its value to appreciate, so you’ll still want to shop around before just choosing the lowest-priced house on the block.

Maybe you signed your home contract years ago and are just now considering getting serious about early mortgage repayment. Take heart! There are some easy steps to follow to make your mortgage disappear in five years or so.

1. Setting a Target Date

The first step: figuring out exactly when you want the mortgage paid off. Choosing your target date will make it easier to figure out how much additional money you need to send to your lender each month.

Five years is a pretty tight timeline for this kind of debt repayment process, but it could be doable depending on your earnings and commitment.

2. Making a Higher Down Payment

The higher your down payment, the less loan balance you’ll have to pay down, so if you can manage it, offer as much as you can right at the start. There are many assistance programs for down payments that might boost your offer and put you on track for paying down your mortgage early.

Also, realize that first-time homebuyers — who can be anyone who has not owned a principal residence in the past three years, and some others — often have access to down payment assistance.

3. Choosing a Shorter Home Loan Term

Obviously, if you want to pay your mortgage off in a shorter amount of time, you can consider choosing a shorter home loan term; most conventional mortgages are paid off over 30 years, though it’s possible to find loans with 15- or even 10-year terms.

However, your interest rate might be higher on those loans in order to make the deal worthwhile to the lender, so for many borrowers, choosing a longer home loan term and making aggressive additional payments is a better option.

4. Making Larger or More Frequent Payments

One of the most achievable ways for most borrowers to pay off a home loan early is to pay more than the monthly minimum, either by adding extra toward the principal in the monthly payment or by paying more than once per month.

Unless you’re due for a six-figure windfall, chipping away at the debt this way might be the smartest option. But how does one come up with the additional money to funnel toward that goal?

5. Spending Less on Other Things

As with most debt repayment strategies, chances are you’ll need to find other ways to cut back on spending in order to set aside more money to put toward the mortgage. This could be as small as ditching the daily latte or as serious as choosing to give up a car.

6. Increasing Income

Another option, if there’s just nothing left to cut? Finding ways to increase your income, perhaps by starting a side hustle or asking for that long-overdue raise.


💡 Quick Tip: A Home Equity Line of Credit (HELOC) brokered by SoFi lets you access up to $500,000 of your home’s equity (up to 90%) to pay for, well, just about anything. It could be a smart way to consolidate debts or find the funds for a big home project.

How Much House Can You Afford Quiz

The Takeaway

Pay off a mortgage in five years? While paying off your home loan early could help you save money on interest, sometimes the money is better spent on other financial goals and projects. So it pays to take a close look at the numbers, just as you did when you got your mortgage in the first place.

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.

SoFi Mortgages: simple, smart, and so affordable.

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Photo credit: iStock/fizkes

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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^²To obtain a home equity loan, SoFi Bank (NMLS #696891) may assist you obtaining a loan from Spring EQ (NMLS #1464945).

All loan terms, fees, and rates may vary based upon individual financial and personal circumstances and state.

You may discuss with your loan officer whether a SoFi Mortgage or a home equity loan from Spring EQ is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit brokered through SoFi. Terms and conditions will apply. Before you apply for a SoFi Mortgage, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and loan amount. Minimum loan amount is $75,000. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria.

SoFi Mortgages originated through SoFi Bank, N.A., NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org). Equal Housing Lender. SoFi Bank, N.A. is currently NOT able to accept applications for refinance loans in NY.

In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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When you close on a home, one of the most important documents you’ll review and sign is your mortgage note. It’s an agreement between you and the lender that outlines the terms and conditions of the mortgage. The document tells you how much and when to pay, and spells out the consequences if you don’t.

What Is a Mortgage Note?

A mortgage note, often referred to as a promissory note, is what you sign when you agree to take on the responsibility of a mortgage. The note outlines:

•   Your interest rate

•   The amount you owe

•   When the payments are due

•   The amount of time it will take to repay the loan

•   How to remit payment

•   Consequences for missed payments

It’s one of the key documents you’ll sign at closing.

Promissory notes also may be used in owner-financed home sales. The buyer and seller sign the document, which contains the loan terms. When a borrower pays the seller directly, the promissory note gives the lender the ability to enforce their rights through a mortgage lien, foreclosure, or eviction.


💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

What Is Included in a Mortgage Note?

The mortgage note outlines the conditions and responsibilities of the buyer. You’ll see sections like these in a mortgage note:

•   Borrower’s promise to pay. This section includes the total amount of money you’re borrowing and the name of the lender to whom you will remit payment.

•   Interest. The interest rate charged on the unpaid principal is listed here.

•   Payments. Borrowers agree to pay a monthly amount before or on a specific date. The place where borrowers can remit payment is also listed.

•   Borrower’s right to prepay. This section specifies a borrower’s ability to pay toward the mortgage principal without penalty. (Some lenders charge a fee if you pay off some or all of the principal early. Make sure you understand whether you have the right to prepay without a penalty before you get to the closing table.)

•   Loan charges. All charges by the lender must be legal. Any amounts over the legal limit will be refunded to the buyer or applied to the principal.

•   Borrower’s failure to pay as required. Default is clearly defined for the buyer, as are late charges and what happens in the event of default.

•   Giving of notices. Borrower and lender will have the details of how to contact each other for legal purposes.

•   Obligations of persons under this note. All people listed on the mortgage note are equally responsible for repayment of the loan.

•   Uniform secured note. Buyers are advised that a security instrument is signed in addition to the note that protects the note holder from potential losses by giving them the ability to foreclose in case of default.

How Does a Mortgage Note Work?

A mortgage or promissory note is drawn up by the lender when preparing your mortgage for closing during the underwriting process. This document is what makes the terms and conditions of the mortgage legally binding.

Borrowers will see the mortgage note at closing, though the terms and conditions will be outlined in a closing disclosure provided at least three business days before the closing date. The closing disclosure document can be compared with the loan estimate that was provided at the beginning of the mortgage application process. (This help center for mortgages is useful if you want to understand the entire mortgage process.)

A mortgage note is accompanied by another document, called the mortgage, security instrument, or deed of trust. It restates the terms of the mortgage note and outlines the rights and responsibilities you have as a borrower. As a security instrument, the document specifically gives the lender the right to foreclose on your property if you fail to make payments. Having this right reduces the risk to the lender, which can offer more competitive terms to the borrower in return.

Who Holds the Mortgage Note?

A mortgage note isn’t usually held by the lending institution that originated your loan. Mortgage notes are often sold, and it’s not easy to tell who holds your mortgage note. This is because the loan servicer (the company that sends your mortgage statements and handles day-to-day management of the loan) is usually different from the note holder.

Selling a Mortgage Note

You’ll see in your closing documents a provision that allows the lender to sell the mortgage note. This is common and legal in home contracts and typically occurs soon after the property closes. Lenders sell mortgages on the secondary mortgage market, usually to one of the large federally backed mortgage companies, Fannie Mae or Freddie Mac. When the mortgages are sold, the lender doesn’t have to keep the mortgage on their balance sheet, which, in turn, allows them to originate more mortgages for other borrowers.

Fannie Mae and Freddie Mac then bundle mortgages into what is called a mortgage-backed security. Investors around the world (think pension funds, mutual funds, insurance companies, and banks) can buy shares of mortgage-backed securities. The investors will receive steady returns as the mortgages are repaid by individual borrowers.

The loan servicer (which may be your original lender or a separate company) typically continues to service your loan, meaning you’ll send your payment to them. They’ll keep a small portion of your mortgage to cover their costs for servicing your loan while sending the rest to the buyer of your note.

When your mortgage note is sold, the terms of your mortgage won’t change. Your payment, interest rate, and due date will remain the same. If your servicer changes for any reason, you’ll be notified of the new servicer and the new way to remit your mortgage payment.

Different Kinds of Mortgage Notes

There are different types of mortgage loans and different kinds of mortgage notes to accompany them.

Secured Loans

With a secured mortgage note, the mortgage uses collateral to secure the property. The collateral is usually the property itself. A secured loan is usually accompanied by better terms, such as a lower interest rate and a longer repayment period.

Private Loans

Private mortgage notes are secured by private lenders. A seller may own the property outright and act as a private lender, setting their own terms for mortgage loans.

Institutional Loans

Institutional notes are mortgage notes issued by traditional lenders, such as financial institutions or banks. They’re highly regulated. Buyers must meet specific criteria, and the loans must have standard interest rates and repayment terms.


💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.

The Takeaway

Understanding your mortgage note and how it works is a critical step in buying and financing a home. You should review the terms of your mortgage well before you arrive at the closing, and it may be helpful to review the details of the mortgage note with a professional, as the note can protect the buyer just as much as the seller.

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.

SoFi Mortgages: simple, smart, and so affordable.

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Photo credit: iStock/Chinnapong

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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

⁺Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

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.

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Homebuyers choose the number of years they’d like their mortgage to last. The 30-year fixed-rate mortgage is by far the most popular, followed by the 15-year fixed-rate mortgage, but terms of 10, 20, 25, and even 40 years are available. The term that will work best for each borrower largely depends on the monthly mortgage payment they can handle and how long they plan to keep the property.

What Is a Mortgage Term?

The term is the number of years it will take to pay off a home loan if the minimum payment is made each month. Knowing how long you plan to stay in your home can affect the type of home loan that fits your situation when you shop for a mortgage — not only short or long term, but also fixed or adjustable interest rate.

Of course, every borrower’s situation is unique. But according to the National Association of Realtors®, the average homeowner tenure was 13.2 years in 2021. And in 2023, people who were selling homes had typically lived in the property for a decade.


💡 Quick Tip: SoFi’s Lock and Look ⁺ feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

How Mortgage Terms Work

For fixed-rate home loans, payments consist of principal and interest, with a fixed interest rate for the life of the loan. With mortgage amortization, the amount going toward the principal starts out small and grows each month, while the amount going toward interest declines each month.

A shorter term, conventional loan generally translates to higher monthly payments but less total interest paid, and a longer term, vice versa. A shorter-term loan also will have a lower interest rate.

This mortgage calculator tool includes an amortization chart that shows how payments break down over a fixed-rate loan term, as well as the total amount of interest paid, which in a fixed-rate loan is predictable.

Most adjustable-rate mortgages (ARMs) also have a 30-year term. You can’t know in advance how much total interest you will pay because the interest rate changes.

How Long Can a Mortgage Term Be?

A few lenders out there offer 40-year mortgages. Qualifying is more difficult, and the rates are the highest among fixed-rate loans, while ARMs can be unpredictable.

The long term means a borrower will make the lowest possible monthly payments but pay more over the life of the loan than any other.


💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.

Fixed-Rate Mortgages vs Adjustable-Rate Mortgages

When you’re first choosing mortgage terms or looking at different types of mortgages, start with one of the basics.

A fixed-rate mortgage is exactly what it sounds like. You lock in an interest rate for the entire term. If market rates rise, yours will not.

An adjustable-rate mortgage is much more complicated. An ARM usually will have a lower initial rate than a comparable fixed-rate mortgage, and a borrower may be able to save significant cash over the first years of the loan.

Recommended: Adjustable Rate Mortgage (ARM) vs. Fixed Rate Mortgage

But a rate adjustment can bring a spike in mortgage payments that could be hard or impossible to bear. With the most common variable-rate loan, the 5/1 ARM, the rate stays the same for the first five years, then changes once a year.

An interest-only ARM has an upside and downside. You’ll pay only the interest for a specified number of years, when payments will be small, but you will not be paying anything toward your mortgage loan balance.

An ARM may suit those who are confident that they can afford increases in monthly payments, even to the maximum amount, or those who plan to sell their home within a short period of time.

ARM seekers may want to prequalify for more than one loan and compare loan estimates. It’s a good idea to know the answers to these questions:

•   How high can the interest rates and my payment go?

•   How high can my interest rate go?

•   How long are my initial payments guaranteed?

•   How often do the rate and payment adjust?

•   What index is used and where is it published?

•   Will I be able to convert the ARM to a fixed-rate mortgage in the future, and are there any fees to do so?

•   Can I afford the highest payment possible if I can’t sell the home, or refinance, before the increase?

Comparing 15-Year and 30-Year Mortgages

Clearly, paying off a mortgage in 15 years rather than 30 sounds great. You’ll get a lower rate, pay much less total interest, and be done with house payments in half the time. The catch? Higher monthly payments. Here’s an example of how a 30- and 15-year fixed-rate mortgage might shake out, not including property taxes and insurance and any homeowners association (HOA) fees.

30-Year vs. 15-Year Fixed-Rate Mortgage

Type	Loan Specs	Rate	Payments	Total Interest Paid
30-year	Appraised value: $375,000 Down payment: $75,000 Loan size: $300,000	4%	Mortgage payment: $1,432	$215,607
15-year	Appraised value: $375,000 Down payment: $75,000 Loan size: $300,000	3.2%	Mortgage payment: $2,101	$78,130

There’s a reason that the 30-year fixed-rate mortgage reigns supreme: manageable payments that ideally leave enough money for emergencies and retirement savings. Borrowers making lower payments can always pay more toward the principal if they want to pay off the mortgage early.

Then again, borrowers with stable finances who can afford the higher payments of a 15-year home loan may find it quite appealing.

The Takeaway

How to pick a mortgage term? Look at your budget, think about how long you plan to stay in the home, and weigh your financial goals and priorities. Consider getting prequalified so you can see what your options are.

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.

SoFi Mortgages: simple, smart, and so affordable.

---

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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

⁺Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

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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Both a loan modification and a loan refinance can lower your monthly payments and help you save money. However, they are not the same thing. Depending on your circumstances, one strategy will make more sense than the other.

If you’re behind on your mortgage payments due to a financial hardship, for example, you might seek out a loan modification. A modification alters the terms of your current loan and can help you avoid default or foreclosure.

If, on the other hand, you’re up to date on your loan payments and looking to save money, you might opt to refinance. This involves taking out a new loan (ideally with better rates and terms) and using it to pay off your existing loan.

Here’s a closer look at loan modification vs. refinance, how each lending option works, and when to choose one or the other.

What Is a Loan Modification?

A loan modification changes the terms of a loan to make the monthly payments more affordable. It’s a strategy that most commonly comes into play with mortgages. A home loan modification is a change in the way the home mortgage loan is structured, primarily to provide some financial relief for struggling homeowners.

Unlike refinancing a mortgage, which pays off the current home loan and replaces it with a new one, a loan modification changes the terms and conditions of the current home loan. These changes might include:

•   A new repayment timetable. A loan modification may extend the term of the loan, allowing the borrower to have more time to pay off the loan.

•   A lower interest rate. Loan modifications may allow borrowers to lower the interest rates on an existing loan. A lower interest rate can reduce a borrower’s monthly payment.

•   Switching from an adjustable rate to a fixed rate. If you currently have an adjustable-rate loan, a loan modification might allow you to change it to a fixed-rate loan. A fixed-rate loan may be easier to manage, since it offers consistent monthly payments over the life of the loan.

A loan modification can be hard to qualify for, as lenders are under no obligation to change the terms and conditions of a loan, even if the borrower is behind on payments. A lender will typically request documents to show financial hardship, such as hardship letters, bank statements, tax returns, and proof of income.

While loan modifications are most common for secured loans, like home mortgages, it’s also possible to get student loan modifications and even personal loan modifications.


💡 Quick Tip: A low-interest personal loan can consolidate your debts, lower your monthly payments, and help you get out of debt sooner.

What Is Refinancing a Loan?

A loan refinance doesn’t just restructure the terms of an existing loan — it replaces the current loan with a new loan that typically has a different interest rate, a longer or shorter term, or both. You’ll need to apply for a new loan, typically with a new lender. Once approved, you use the new loan to pay off the old loan. Moving forward, you only make payments on the new loan.

Refinancing a loan can make sense if you can:

•   Qualify for a lower interest rate. The classic reason to refi any type of loan is to lower your interest rate. With home loans, however, you’ll want to consider fees and closing costs involved in a mortgage refinance, since they can eat into any savings you might get with the lower rate.

•   Extend the repayment terms. Having a longer period of time to pay off a loan generally lowers the monthly payment and can relieve a borrower’s financial stress. Just keep in mind that extending the term of a loan generally increases the amount of interest you pay, increasing the total cost of the loan.

•   Shorten the loan repayment time. While refinancing a loan to a shorter repayment term may increase the monthly loan payments, it can reduce the overall cost of the loan by allowing you to pay off the debt faster. This can result in a significant cost savings.

Recommended: What Are Personal Loans Used For?

Refinance vs Loan Modification: Pros and Cons

Loan refinance is typically something a borrower chooses to do, whereas loan modification is generally something a borrower needs to do, often as a last resort.

Here’s a look at the pros and cons of each option.

Loan Modification		Refinancing
Pros	Cons	Pros	Cons
Avoid loan default and foreclosure	Could negatively impact credit	May be able to lower interest rate	You’ll need solid credit and income
Lower your monthly payment	Cash out is not an option	May be able to shorten or lengthen your loan term	Closing costs may lower overall savings
Avoid closing costs	Lenders not required to grant modification	May be able to turn home equity into cash	You could reset the clock on your loan

Benefits of Loan Modification

While a loan modification is rarely a borrower’s first choice, it comes with some advantages. Here are a few to consider.

•   Avoid default and foreclosure. Getting a loan modification can help you avoid defaulting on your mortgage and potentially losing your home as a result of missing mortgage payments.

•   Change the loan’s terms. It may be possible to increase the length of your loan, which would lower your monthly payment. Or, if the original interest rate was variable, you might be able to switch to a fixed rate, which could result in savings over the life of the loan.

•   Avoid closing costs. Unlike a loan refinance, a loan modification allows you to keep the same loan. This helps you avoid having to pay closing costs (or other fees) that come with getting a new loan.

Drawbacks of Loan Modification

Since loan modification is generally an effort to prevent foreclosure on the borrower’s home, there are some drawbacks to be aware of.

•   It could have a negative effect on your credit. A loan modification on a credit report is typically a negative entry and could lower your credit score. However, having a foreclosure — or even missed payments — can be more detrimental to a person’s overall creditworthiness.

•   Tapping home equity for cash is not an option. Unlike refinancing, a loan modification cannot be used to tap home equity for an extra lump sum of cash (called a cash-out refi). If your monthly payments are lower after modification, though, you may have more funds to pay other expenses each month.

•   There is a hardship requirement. It’s typically necessary to prove financial hardship to qualify for loan modification. Lenders may want to see that your extenuating financial circumstances are involuntary and that you’ve made an effort to address them, or have a plan to do so, before considering loan modification.

Recommended: Guide to Mortgage Relief Programs

Benefits of Refinancing a Loan

For borrowers with a strong financial foundation, refinancing a mortgage or other type of loan comes with a number of benefits. Here are some to consider.

•   You may be able to get a lower interest rate. If your credit and income is strong, you may be able to qualify for an interest rate that is lower than your current loan, which could mean a savings over the life of the loan.

•   You may be able to shorten or extend the term of the loan. A shorter loan term can mean higher monthly payments but is likely to result in an overall savings. A longer loan term generally means lower monthly payments, but may increase your costs.

•   You may be able to pull cash out of your home. If you opt for a cash-out refinance, you can turn some of your equity in your home into cash that you can use however you want. With this type of refinance, the new loan is for a greater amount than what is owed, the old loan is paid off, and the excess cash can be used for things like home renovations or credit card consolidation.


💡 Quick Tip: If you’ve got high-interest credit card debt, a personal loan is one way to get control of it. But you’ll want to make sure the loan’s interest rate is much lower than the credit cards’ rates — and that you can make the monthly payments.

Drawbacks of Refinancing a Loan

Refinancing a loan also comes with some disadvantages. Here are some to keep in mind.

•   You’ll need strong credit and income. Lenders who offer refinancing typically want to see that you are in a solid financial position before they issue you a new loan. If your situation has improved since you originally financed, you could qualify for better rates and terms.

•   Closing costs can be steep. When refinancing a mortgage, you typically need to pay closing costs. Before choosing a mortgage refi, you’ll want to look closely at any closing costs a lender charges, and whether those costs are paid in cash or rolled into the new mortgage loan. Consider how quickly you’ll be able to recoup those costs to determine if the refinance is worth it.

•   You could set yourself back on loan payoff. When you refinance a loan, you can choose a new loan term. If you’re already five years into a 30-year mortgage and you refinance for a new 30-year loan, for example, you’ll be in debt five years longer than you originally planned. And if you don’t get a lower interest rate, extending your term can increase your costs.

Is It Better to Refinance or Get a Loan Modification?

It all depends on your situation. If you have solid credit and are current on your loan payments, you’ll likely want to choose refinancing over loan modification. To qualify for a refinance, you’ll need to have a loan in good standing and prove that you make enough money to absorb the new payments.

If you’re behind on your loan payments and trying to avoid negative consequences (like loan default or foreclosure on your home), your best option is likely going to be loan modification. Provided the lender is willing, you may be able to change the rate or terms of your loan to make repayment more manageable. This may be more agreeable to a lender than having to take expensive legal action against you.

Recommended: 11 Types of Personal Loans & Their Differences

Alternatives to Refinancing and Loan Modification

If you’re having trouble making your mortgage payments or just looking for a way to save money on a debt, here are some other options to consider besides refinancing and loan modification.

Mortgage Forbearance

For borrowers facing short-term financial challenges, a mortgage forbearance may be an option to consider.

Lenders may grant a term of forbearance — typically three to six months, with the possibility of extending the term — during which the borrower doesn’t make loan payments or makes reduced payments. During that time, the lender also agrees not to pursue foreclosure.

As with a loan modification, proof of hardship is typically required. A lender’s definition of hardship may include divorce, job loss, natural disasters, costs associated with medical emergencies, and more.

During a period of forbearance, interest will continue to accrue, and the borrower will still be responsible for expenses such as homeowners insurance and property taxes.

At the end of the forbearance period, the borrower may have to repay any missed payments in addition to accrued interest. Some lenders may work with the borrower to set up a repayment plan rather than requiring one lump repayment.

Mortgage Recasting

With a mortgage recast, you make a lump sum payment toward the principal balance of the loan. The lender will then recast, or re-amortize, your remaining loan repayment schedule. Since the principal amount is smaller after the lump-sum payment is made, each monthly payment for the remaining life of the loan will be smaller, even though your interest rate and term remain the same.

Making Extra Principal Payments

With any type of loan, you may be able to lower your borrowing costs by occasionally (or regularly) making extra payments towards principal. This can help you pay back what you borrowed ahead of schedule and reduce your costs.

Before you prepay any type of loan, however, you’ll want to make sure the lender does not charge a prepayment penalty, since that might wipe out any savings. You’ll also want to make sure that the lender applies any extra payments you make directly towards principal (and not towards future monthly payments).

The Takeaway

Loan modification vs loan refinancing…which one wins?

It depends on your financial situation. If you’re dealing with financial challenges and at risk of home foreclosure, you may want to look into a loan modification, which could be easier to qualify for than loan refinancing.

If you’re interested in getting a lower interest rate or lowering your monthly debt payment, refinancing likely makes more sense. A refinance may also make sense if you’re looking to tap your home equity to access extra cash. With a cash-out refi, you replace your current mortgage with a new, larger loan and receive the excess amount in cash.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

What are the disadvantages of loan modification?

A loan modification typically comes with a hardship requirement. A lender may ask to see proof that your financial circumstances are involuntary and that you’ve made an effort to address them before considering loan modification.

A loan modification can also have a temporary negative effect on your credit.

Is a loan modification bad for your credit?

A lender may report a loan modification to the credit bureaus as a type of settlement or adjustment to the loan’s terms, which could negatively impact on your credit. However, the effect will likely be less (and shorter in duration) than the impact a series of late or missed payments or a foreclosure on your home would have.

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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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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.

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If your monthly mortgage payment no longer fits your lifestyle or financial goals, you may be able to change it with mortgage refinancing or recasting. Recasting and refinancing are two ways a borrower can save on mortgage costs — sometimes a jaw-dropping amount. To understand which might be best for you, it helps to understand the difference between them and the pros and cons of each.

Recasting vs Refinancing

Recasting is the reamortizing of an existing mortgage, meaning the lender will recalculate your monthly payments. Refinancing involves taking out a completely new mortgage with a new rate, and possibly a new term, and paying off your old mortgage in the process.

Recasting

If your lender offers mortgage recasting and your loan is eligible, here’s how it works: You make a large lump-sum payment — $10,000 might be required — toward the principal balance of your mortgage loan. The lender recalculates the monthly payments based on the new, lower balance, which shrinks the payments. The lender may charge a few hundred dollars to reamortize the loan.

Mortgage recasting does not change your loan length or interest rate. But because your principal amount is lower, you’ll have lower monthly payments and will pay less interest over the life of the loan.

If you were to put a chunk of money toward your mortgage principal and not recast the loan, your payments would not change, though the extra principal payment would reduce your interest expense over the life of the loan.

Who might opt for mortgage recasting? Someone who has received a windfall and wants to put it toward the mortgage might like this option. Sometimes it’s someone who has bought a new home but hasn’t sold the previous one. Once the old home is sold, the homeowner can use some of the proceeds to recast the new mortgage.

Another fan of recasting might be someone who wants to use the lump sum to pay their loan down to 80% of the home’s value so they can stop paying for private mortgage insurance (PMI).

FHA, VA, and USDA loans are not eligible for mortgage recasting. Some jumbo loans are also excluded. If you want to change the monthly payments on those types of mortgages, you’ll need to refinance your loan.

Refinancing

When you seek refinancing, you’re applying for a brand-new loan with a new rate and terms and possibly from a new lender. Most people’s goal is a lower interest rate, a shorter loan term, or both.

While finding a competitive offer might take some legwork, refinancing could help you save money. A lower interest rate for a home loan of the same length will reduce monthly payments and the total amount of interest paid over the life of the loan.

A homeowner who refinances to a shorter term, say from 30 years to 15, will pay much less total loan interest. Fifteen-year mortgages also often come with a lower interest rate than 30-year home loans.

Equity-rich homeowners who’d like to get their hands on cash may find cash-out refinancing appealing.


💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).

Pros and Cons of Recasting

Mortgage recasting lowers your monthly mortgage payments and lets you save on total loan interest while keeping the same interest rate. Since you recast your mortgage with your existing lender, the process is pretty straightforward, and the cost could be as low as $150.

There are some potential drawbacks to mortgage recasting, however. Making a large lump-sum payment means you could be trading liquidity for equity, and creating financial instability if unexpected expenses arise or if the housing market takes a downward turn.

If you have other debts with higher interest rates, you may want to avoid mortgage recasting. It could make more sense to use the money you would put toward the principal to pay down your higher-interest debt first.

“No matter what method works best for you, it’s important to cut spending as much as you can while you’re tackling your debts,” said Kendall Meade, a Certified Financial Planner at SoFi.

Recommended: Cash-Out Refinance vs HELOC

Pros and Cons of Refinancing

If you are eligible to refinance, you won’t need a large cash source in order to lower your mortgage payments. Instead, your main goal is to qualify for a lower interest rate. If you succeed, you will save a lot of money in interest over time.

With a cash-out refi, you can use that money for whatever you need: pay down higher-interest debt, add to the college fund, or remodel your kitchen.

Refinancing involves what looks like a bummer: closing costs, which could range from 2% to 6% of the remaining principal. You’re taking out a new mortgage, after all. Some lenders will let you roll closing costs into your loan.

A lower rate could make it all worthwhile, though. It’s a good idea to calculate the break-even point, when interest savings will exceed closing costs. Everything beyond that break-even point will be savings.

Reducing your loan term with a refi could result in a higher mortgage payment but tremendous interest savings over the life of the new loan.

Refinancing may make sense for homeowners who are planning to stay put for years; those who want to switch their adjustable-rate mortgage to a fixed-rate one; and borrowers with FHA loans who want to shed mortgage insurance premiums (MIP), on a loan they’ve paid down or a home that has appreciated. Most FHA loans carry mortgage insurance for the life of the loan.

No matter the home financing topic, find a lender willing to provide transparent answers to your mortgage questions.


💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

The Takeaway

A mortgage recast vs. refinance: different animals with similar aims. A recast requires a lump sum but will shrink payments and total loan interest. A mortgage refinance may greatly reduce borrower costs and sometimes free up cash. Which one is right for you will depend on your current loan terms and your available cash, among other factors.

SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.

A new mortgage refinance could be a game changer for your finances.

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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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

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