Key takeaways
- Settling your mortgage indicates that you now own 100% of your home outright and are no longer required to send monthly payment installments to your lending institution.
- After your loan is settled, you will be responsible for paying your home insurance premiums and property taxes yourself, rather than having them included via an escrow account.
- Deciding to pay off a mortgage ahead of schedule comes with advantages and disadvantages, hence evaluate your broader financial objectives prior to making this choice.
Losing your mortgage is a significant achievement: You completely own your home without any debts.
So now what?
It’s a moment to celebrate, but it’s also one that comes with certain specific steps, like ensuring you have proof that you’re the full legal owner of the property. And also that the homeowners insurance and property taxes continue to get paid.
Let’s look at what happens when you pay off your mortgage and what you should do afterward.
What happens when you pay off your mortgage?
Here are a few things you’ll need to do once you’ve paid off your mortgage.
Collect documents from your servicer
When you pay off your mortgage, your lender or your loan servicer will likely send you paperwork, confirming that you’ve fulfilled your final payment toward the loan and formally releasing your mortgage obligation. Here are some of the documents you might receive once you’ve paid off your loan:
- A canceled promissory note: This is one of the many documents you would have signed at closing, promising to pay back the amount of your mortgage. The canceled note, issued by your mortgage lender, indicates your fulfillment of that promise.
- A loan payoff letter: This document will show (down to the penny) what you need to pay off the remainder of your mortgage, plus any owed interest or fees. If you have paid everything off, it will verify that as well.
- A deed of reconveyance: This document serves as a lien release indicating that your mortgage company no longer holds any legal claim over your property.
- Escrow funds: If there is any money left in your escrow account once your mortgage is fully paid, your lender should send you a check or direct deposit for those funds.
- Property deed: This document proves that you are the sole property owner.
- A certificate of satisfaction: Your local recorder or county clerk issues this document showing that you’ve paid off the loan on your property.
Once you have them, keep the documents in a secure place, like a safe or a safe deposit box.
Update your homeowners insurance
Once your mortgage is paid off, you’ll need to update your homeowners insurance policy. You should remove your mortgage company from your policy by eliminating the mortgagee clause , which entitles them to reimbursement if the home is damaged or destroyed.
After your loan is closed, your mortgage servicer will also close your escrow account and return any remaining funds to you. Legally, the servicer must issue your escrow refund within 20 days of closing the account. You will then be responsible for paying your home insurance premiums on your own.
Even though it's not mandatory to keep homeowners insurance after paying off your mortgage, it is still advisable to do so.
Pay your own property taxes
You'll have to arrange to get your bills sent over. your local property taxes immediately, as your mortgage company will stop covering these expenses from your escrow account.
Based on your location, you may get one comprehensive yearly property tax statement from your municipality, which could be your city, town, or county, or alternatively, several separate invoices from different bodies such as school districts, fire departments, and utility services including sewage and water boards. For help in pinpointing all the pertinent taxation agencies, visit the records division at your local town or city hall for assistance.
Reach out to your accountant.
Once you've paid off your mortgage, inform your accountant. You won’t be making those payments anymore. mortgage interest to deduct on your tax return, which could potentially increase your tax liability.
However, paying off your mortgage might also free up cash that you can use for other purposes. Your accountant or a financial advisor can suggest ways to leverage the money you’re saving. You might use the extra funds to:
- Pay off other debt
- Increase contributions to your retirement accounts
- Boost your emergency savings , ideally in a high-yield savings account
- Save money for a child’s college education expenses
- Undertake home renovations (refer to the FAQ section on accessing home equity , below)
Monitor your credit score closely.
Fully paying off your mortgage typically doesn’t affect your credit score much. However, after removing the mortgage from your credit record, your score might decrease somewhat due to less diversity in your debts—meaning fewer different kinds of loans. Additionally, since account longevity plays a role, and considering how long you've had the mortgage, this could also lead to a minor dip in your credit rating.
Conversely, having a smaller mortgage balance will result in a reduced credit utilization ratio. Thus, settling your mortgage could positively influence your credit score. Additionally, informing your credit card issuers about your paid-off mortgage might allow you to boost your current credit limits.
Usually, it can take anywhere from 30 to 60 days for your lender to inform the three major credit bureaus—Equifax, Experian, and TransUnion—that an account has been closed. This delay means your credit score may not update immediately following your last payment.
Once you have paid off your mortgage, keep an eye on your credit report until the account appears as closed. Should several months pass and the account continues to show as active across all three credit reporting agencies, reach out to your lender and request they inform the bureaus accordingly.
Ways to Accelerate Mortgage Repayment
If your aim is to repay your mortgage more quickly, you essentially have two primary choices:
- Prepaying the principal: This includes allocating extra money toward the main portion of your loan, thereby decreasing it. total interest paid Throughout the duration of the loan, you can speed up how quickly your debt decreases. You have several options: making an additional full payment once-off, opting for more frequent but smaller bi-weekly payments that collectively result in one extra annual installment, or simply boosting each monthly contribution with the surplus going directly towards reducing your mortgage’s principal.
- Refinancing: Rather than opting for prepaid options, you have the choice to refinance your loan, essentially swapping out your current mortgage for a fresh one. By doing this, refinancing allows you to expedite paying off your mortgage faster—provided you opt for a shorter duration; for instance, choosing a 15-year mortgage over a traditional 30-year one with your initial agreement. However, keep in mind that although this approach reduces the overall time span, it raises the amount due per installment, barring any improvements in interest rates or similar factors. lower interest rate on the new loan.
Is paying off your mortgage ahead of schedule advisable?
Certain borrowers choose to accelerate the repayment of their mortgage to reduce interest costs and increase monthly liquidity. Nonetheless, this strategy may not be optimal, particularly if financial resources are available.
By paying off your mortgage ahead of schedule, you lose access to those readily available funds which might otherwise be used for other investments.
As stated by Greg McBride, CFA, and the lead financial analyst at DIWIDA, "Instead of locking away funds in an illiquid investment like real estate, which may not be accessible during times of need, you could utilize those resources elsewhere. For instance, consider paying down high-interest debts such as credit card balances or personal loans, augmenting your retirement fund through increased contributions to your employer’s 401(k) plan or setting aside money in an individual retirement account (IRA), or building up your rainy-day savings." invest For other financial objectives such as funding your children’s education or investing via a brokerage account."
You should also take into account the condition of the economy prior to making your decision. prepay your mortgage Experts typically recommend avoiding settling a home loan prior to an economic downturn since you'll utilize funds that could potentially be more important in a financial emergency.
Paying off your mortgage ahead of schedule may not be the most prudent way to utilize your funds if you benefit from a favorable interest rate, particularly when dealing with more expensive debts elsewhere. According to McBride, "Prioritizing prepayment of your mortgage becomes less important when you're enjoying such low-interest rates—sub-4% or 5%."
If your other monetary responsibilities are well-managed, accelerating the payoff of your mortgage could be beneficial. Regardless of whether you decide to pay it off ahead of schedule or not, after eliminating your monthly mortgage expense, you can redirect those funds towards savings and investments instead. Additionally, you will gain peace of mind from owning your home outright, providing stability should your financial situation shift.
Frequently asked questions
Additional contribution by Erik Martin