Does Paying Extra On Mortgage Help Credit Score?

If you have a mortgage, you might be wondering whether making extra payments on your mortgage will help your credit score? This post answers this question and provides you with everything you need to know about how your mortgage affects your credit score.

Does Paying Extra On Mortgage Help Credit Score?

Paying extra on your mortgage is unlikely to help your credit or provide an additional boost. That said, making on-time mortgage payments creates an excellent payment history that helps your credit. This is so because your payment history accounts for 35% of your credit score. So, making timely mortgage payments boosts your credit score. However, paying extra on your mortgage is unlikely to provide additional help to your credit score.

That said, although making additional payments on your mortgage does not boost your credit score, keeping your mortgage account open and continuing to make payments on it will help you establish excellent credit. This is so because your payment history is the most important factor affecting your credit score.

Also, having an open mortgage account that’s in good standing provides a boost to your credit score because your credit score factors in the diversity of your accounts. Having a mortgage account boosts the diversity of your accounts, contributing to a better credit score.

If you’re considering paying off your mortgage account early, you should keep in mind that paying off your mortgage closes the mortgage account on your credit report, reducing the diversity of accounts on your credit report, possibly slightly lowering your credit score. So, making extra payments to pay off your mortgage early can actually result in a temporary lowering of your credit score.

That said, if you do pay off your mortgage and your credit score drops a few points, rest assured that the small drop is temporary and your credit score should recover within a very short period of time.

What Are The Advantages of Paying Extra On Your Mortgage?

The biggest advantage to paying extra on your mortgage is that you might be able to pay off your mortgage earlier than someone who is only making the mortgage payment, allowing you to get out of debt faster. Getting out of debt faster is a great way to free up some of your income for other things that you may want to purchase or invest in.

Also, paying off your mortgage early can potentially save you a ton of money on interest. Whenever you pay off loans or other debts in a shorter period of time, you are likely going to save a ton of money on interest. You can use the money you’ve saved on paying interest for other purchases or investment purposes.

Thing to Consider Before Making Extra Payments On Your Mortgage to Pay it Off Early

Before paying extra to pay off your mortgage early, you should consider whether your mortgage includes a prepayment penalty. A prepayment penalty is a penalty that you’ll have to pay for paying off your mortgage earlier than the expiration of your term. For example, if you have a 15-year mortgage and you pay it off in 10 years before 15 years have elapsed, you may be liable for a pre-payment penalty.

Prepayment penalties vary from one lender to another, but you should consider whether you’ll save money by off your loan early after including the prepayment penalty in your calculations or whether you should continue to pay off your loan according to the schedule set for you by your lender. If you’ll save money, it might be worth it to pay off your loan early. However, if you will end up paying significantly more by paying off your mortgage early, it might be worth it to hold off on paying it off.

The second thing that you should consider is whether you can use the money you already have on hand to make more than you would save by paying off your mortgage early. For example, if your bank offers savings accounts that pay more interest than the interest you’re paying on your loan, you should consider placing your money in the savings account as you would make more money by doing so.

Additionally, you should consider other types of investments, such as purchasing stocks that could appreciate with time, earning you more money than you would save by using the money to pay extra on your mortgage. If you’re young and you can take on more risk, you can choose an aggressive investment strategy that promises higher payouts, or if you’re nearing retirement, you can choose a safer investment strategy that pays more than paying off your mortgage early.

Should You Pay Off Your Mortgage Early?

There is nothing more liberating than paying off a mortgage early. However, should you pay off your mortgage early? We’ve provided you with some things to consider before setting aside money to make extra payments on your home loan. If you have extra cash and you want to pay off your mortgage early, you should do so if you are not able to use the money to make more money than you would save by paying off your mortgage early.

How Does Paying Off Your Home Loan Early Affect Your Credit Score?

Paying off your mortgage early is unlikely to improve your credit score by much. In fact, paying off your home loan early could temporarily lower your credit score since it can reduce your credit mix (diversity of open accounts). So, keeping your mortgage open for longer can actually contribute to a better credit score. But, you should keep paying a mortgage simply to maintain your high credit score. Closing a home loan account will result in a small and temporary drop in your credit score. Your credit score will likely recover within a short few months of continuing to make payments on your other open loans and credit cards.

That said, having a mortgage that’s paid off will continue to provide a boost to your credit score, especially if you’ve made all of the payments on your account. This is so because paid off mortgages where you have missed no payments remain on your credit report for 10 years after you’ve paid off the mortgage. So long as the paid-off mortgage appears on your credit report, it will continue to provide a boost for your credit score.

Frequently Asked Questions (FAQs)

1. Why did my credit score drop when I paid off my mortgage early?

Your credit score may have dropped when you paid off your mortgage because paying off a mortgage closes a mortgage account on your credit report. When you close a mortgage account, you reduce your credit mix (diversity of open accounts). Reducing your credit mix can lower your credit score since your credit mix accounts for 10% of your credit score. For this reason, your credit score may have dropped. That said, a drop in your credit score after paying off a mortgage is likely temporary in nature. Continue making all of your other payments and your credit score should rebound within a very short period of time.

2. Does paying additional principal on a mortgage help my credit?

No, paying additional principal on your home loan is unlikely going to help your credit. Making your payments on time helps your credit, paying extra does not. That said, if you have extra money to pay off your mortgage faster, you could save a significant amount of money in the long run.

3. What happens if I pay extra money towards the principal on my mortgage?

If you pay extra towards your principal, you could finish paying off your home earlier, saving a significant amount of money on interest. That said, make sure to designate your payment as a principal payment to pay down the principal on your mortgage.