Quick overview
When a loan matures, creditors expect the outstanding balance to be settled. Most borrowers choose one of three exits: refinance the debt, pay it off in full, or sell the collateral (for example, a home or business asset). Each choice has different cash‑flow, tax, and short‑term liquidity consequences.
Key decision checklist
- Confirm the maturity date, outstanding principal, and any balloon payment.
- Check the loan agreement for prepayment penalties or fees (common on commercial and some mortgage products).
- Compare current market interest rates to your existing rate.
- Estimate closing or transaction costs (refinance fees, realtor and closing costs if selling).
- Assess your cash reserves and future liquidity needs.
In my practice, I advise clients to run a simple break‑even calculation before refinancing: months to recoup = total refinance costs ÷ monthly savings. If you expect to keep the loan longer than that number of months, refinancing usually makes sense.
Option 1 — Refinance: when it makes sense
Refinancing replaces the current loan with a new loan. Typical reasons to refinance include lowering the interest rate, shortening the term, moving from interest‑only or adjustable rates to fixed rates, or taking cash out.
Pros:
- Lower monthly payments or lower interest expense over time.
- Opportunity to change loan structure (fixed vs. variable, term length).
- Can consolidate multiple loans into one.
Cons: - Closing costs and fees can be substantial.
- Lower payments may come with a longer term and more total interest.
- Some loans (especially federal student loans or certain business debts) have different rules or benefits that may be lost when refinancing.
Practical notes:
- Always get a Loan Estimate and compare total costs. Use the months‑to‑recoup formula to test the math.
- Check for prepayment premiums on the current loan; those can wipe out refinance savings. See our guide to prepayment premiums and when they apply to your refinance.
- For timing the market, review resources about refinance timing and when to lock a new interest rate.
- Expect closing cost differences when you refinance; learn what typically changes in our explainer on closing costs when you refinance a mortgage.
Option 2 — Pay off: when immediate payoff is the best exit
Paying off the loan at maturity uses cash, savings, or windfalls to eliminate the debt.
Pros:
- No ongoing interest expense; simplifies your balance sheet.
- Removes lender requirements, covenants, and potential risks tied to the loan.
Cons: - Reduces liquidity and emergency reserves.
- Opportunity cost: using cash to pay a loan may prevent higher‑return uses of that capital.
When to pay off:
- The loan rate is higher than reasonable alternatives and you have adequate emergency reserves.
- You face large upcoming costs and prefer to reduce monthly obligations.
- You have incentive to remove lender restrictions (e.g., to prepare a sale or business pivot).
Tax note: mortgage interest can still be deductible in some cases; check IRS guidance on the mortgage interest deduction before deciding (see IRS: Mortgage Interest Deduction).
Option 3 — Sell the asset: practical considerations
Selling the collateral (for example, a home or business asset) lets the sale proceeds satisfy the loan balance.
Pros:
- Converts an illiquid asset into cash; may realize gains.
- Allows you to eliminate debt without using savings.
Cons: - Transaction costs (commissions, closing costs) and taxes may reduce proceeds.
- You lose ownership and future upside of the asset.
Practical tips:
- Price and market timing matter; selling when demand is strong improves your ability to pay the loan and retain net proceeds.
- Factor in transfer taxes, real estate commissions, and any payoff penalties.
How to choose — a step‑by‑step decision guide
- Get the payoff amount and a written payoff quote from your lender.
- Confirm any prepayment penalties, balloon payments, or maturity‑related fees in your promissory note.
- Collect current rate offers and Loan Estimates if you’re considering refinancing.
- Add up all costs (refinance closing costs, appraisal, realtor commissions, taxes) and estimate monthly cash‑flow changes.
- Run the break‑even analysis for refinance and compare to your liquidity if you pay off.
- Ask whether selling triggers capital gains or other taxable events—consult a tax advisor.
- If uncertain, schedule a conversation with a certified financial planner or lender to model scenarios.
Common pitfalls
- Ignoring prepayment clauses or balloon features.
- Failing to include one‑time costs in refinance math.
- Letting emotion or short‑term market noise drive the decision instead of clear cash‑flow analysis.
Red flags to address with your lender
- Ambiguous payoff amounts.
- Unclear prepayment penalty language.
- Short notice of maturity without a clear extension or refinance path.
Professional tips
- Start planning 6–12 months before maturity for mortgages and 3–6 months for smaller consumer loans.
- Get multiple refinance quotes and compare APR, not just the nominal rate.
- Preserve liquidity: even if you can pay off the loan, keep an emergency reserve.
Sources and further reading
- Consumer Financial Protection Bureau — Mortgages and refinancing basics: https://www.consumerfinance.gov/ (CFPB)
- IRS — Mortgage interest deduction and related guidance: https://www.irs.gov/credits-deductions/individuals/mortgage-interest-deduction
- FinHelp articles: Refinance timing: When to lock a new interest rate, Understanding prepayment premiums and when they apply to your refinance, How closing costs change when you refinance a mortgage.
Professional disclaimer: This article is educational and does not replace personalized financial, legal, or tax advice. Consult a qualified advisor to apply these concepts to your situation.
