Will Early Mortgage Payoff Negatively Affect Credit Rating?

Mortgages are usually the largest loan for a borrower, but paying it off might not be the best thing for your credit score or your money. Paying off that mortgage now could drop your score enough that it takes you out of the best credit score tier and make loans, such as a future second mortgage, more expensive. However, you must consider how much you can save by paying early.

Identification

Paying off a mortgage may or may not negatively affect your credit rating. There are so many factors that go into the FICO score calculation that nothing is for certain. You may even see a slight boost to your score, because you eliminated a large amount of debt from your credit profile. If you see a boost in your score, it probably won't be by much.

Considerations

The algorithm used by the credit reporting bureaus gives far less weigh to eliminating secured debt, like a mortgage, because of the low risk to the lender. Instead, most of the benefit of a secured installment loan comes from the good payment history and adding length to your credit profile. If this is your only installment loan, your score should drop, because you do not have a good mix of loans. The credit score formula derives 10 percent of the calculation from the borrower managing several types of loans at once.

Other Debt

In general, mortgages have the lowest annual percent yield of any type of loan. Instead of paying down the mortgage, you could divert those funds to a more expensive debt, such as a credit card. Eliminating credit card debt usually raises a score much more than an installment loan. Also, this is a more efficient use of your money. You should pay off debts with the highest APY first, not the account with the highest balance.

Tip

If your mortgage is your only significant debt, consider the savings by paying it off early -- it could add up to tens of thousands of dollars. Also, review your investments as mortgages have interest rates that lag behind the return received on certain investments, such as, stocks. It makes fiscal sense to put money in stock with an expected return of 10 percent, rather than on a mortgage that only costs six percent annually. By investing, you prevent the possibility of your credit score dropping and earn a better return.