What happens when you pay off your mortgage?
Key takeaways
- Having no mortgage means you're 100% owners of your home and no longer have to make monthly payments to cover the loan.
- Once your loan is paid off, you will be personally responsible for paying your home insurance premiums and property taxes directly out of your own funds, rather than having these costs paid for through an escrow account.
- Considering paying off a mortgage early involves weighing the advantages and disadvantages, so take into account your other financial objectives beforehand.
Reaching the end of your mortgage payments is a significant achievement: you hold full ownership of your home without any loans outstanding.
So now what?
It's time to celebrate, but it's also a moment that requires some specific tasks to be completed, such as verifying that you're the sole legal owner of the property. Additionally, you'll need to confirm that your homeowners insurance and property taxes remain up to date.
Let's explore what happens when you pay off your mortgage and what you should consider next.
When you finally pay the entire balance of your mortgage, you own your house free and clear. This experience is commonly referred to as "paying off your mortgage" or being "mortgage-free."
Here are some things you'll need to consider once you've paid off your mortgage and there are no longer any remaining payments (such as a balloon payment) scheduled to be made.
Obtain documents from your servicer
When you pay off your mortgage, your lender or loan servicer will typically send you documents confirming that you've completed all payments on the loan and released your mortgage obligation. Here are some of the documents you might receive after paying off your loan:
- This is one of the records you sign at the time of closing, agreeing to repay the amount borrowed to obtain the mortgage. The canceled note, provided by your mortgage lender, shows that debt has been paid off as agreed.
- This document will clearly show you the remaining balance of your mortgage, including any outstanding interest or fees. If you've already paid off the entire mortgage, it will confirm that too.
- This document confirms that the bank or lender is releasing its claim to your property, effectively ending their interest in it.
- Once your mortgage has been fully paid off, your lender should issue a payment to you, either by check or direct deposit.
- This paperwork confirms that you exclusively own the property.
- Your local recorder or county clerk issues this document, which confirms that you've paid off the loan on your property.
Once you get the documents, store them securely in a safe or a safe deposit box.
Update your homeowners insurance
Requires them to be compensated if the home is damaged or destroyed.
After your loan is closed, your mortgage servicer will close your escrow account and refund any remaining money to you. According to the law, your servicer has to give you your escrow refund within 20 days after closing the account. After that, it's your responsibility to pay the premiums for your homeowners insurance.
Even though your mortgage is fully paid off, it's still a good idea to continue having homeowners insurance.
You can pay your own property taxes
Since your mortgage company will no longer be adding these to your escrow account, you will need to make additional monthly payments.
Depending on where you live, you might receive just one annual property tax bill from your city, town, or county, or you could get multiple bills from entities such as local school districts, fire departments, and sewer and water districts. To find out which taxing authorities affect your property, your town or city hall clerk's office can provide assistance.
Contact your accountant
When you include this income on your tax return, it may result in a greater tax bill.
Paying off your mortgage can also create a financial opportunity. You'll have extra money available for other uses. Your financial advisor or accountant can help you determine how to make the most of this savings. With the extra cash, you can consider options such as:
- Pay off other debt
- Boost your savings in your retirement funds
- high-yield savings account
- Plan ahead to budget for a child's future college expenses.
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Monitor your credit score closely
Paying off your mortgage usually won't have a big effect on your credit score. However, once your mortgage is removed from your credit report, your score might drop a bit because you have less variety in the different kinds of debt you owe. Additionally, the age of your accounts can also matter, and since you've been paying off your mortgage for a long time, that might also slightly lower your credit score.
On the other hand, the smaller your remaining mortgage balance, the lower your credit utilization. Therefore, paying off your mortgage can have a beneficial effect on your credit score. Additionally, you might be able to increase the credit limits on your existing credit cards by notifying your credit card companies that you're no longer making mortgage payments.
Ordinarily, it takes between 30 to 60 days for your lender to report a closed account to the three credit reporting agencies, including Equifax, Experian, and TransUnion. As a result, you may not instantly see your credit score change after you make your last payment.
After paying off your mortgage, it's a good idea to keep an eye on your credit report until you see that the account is listed as closed. If, after a few months, you still see the account showing as open with all three credit reporting agencies, reach out to your lender and ask them to send a notice to the bureaus.
Paying Off Your Mortgage Quickly
If you want to pay off your mortgage sooner, you have two primary choices:
- Over the life of the loan, this can speed up how quickly your balance decreases. You can either make a one-time large payment; make smaller payments every two weeks, which amounts to an additional payment per year; or boost each monthly payment, ensuring any extra pays down the mortgage principal.
- on the new loan.
Should you pay off your mortgage early?
Some borrowers prefer to pay off their mortgage ahead of schedule in order to save on interest and leave themselves with extra cash each month. However, this isn’t always the best decision, even if you have the funds available.
When you pay off your mortgage early, you lose immediate access to the money that could be used for other investments or financial opportunities.
For other financial goals, such as funding your children’s education or investing through a brokerage account.
You should reserve the money you'll need for daily expenses in a savings account, even if you already have a full emergency fund.
Paying off your mortgage early isn't always the smartest move, especially if you have a low-interest rate on it - and other debt is costing you even more. "Prepaying your mortgage is relatively low on your financial to-do list, especially if you have interest rates on it of 4% or lower," says McBride.
If your other financial obligations are in order, paying off your mortgage ahead of schedule can make sense. Additionally, whether you pay it off early or not, once you're no longer making mortgage payments, you can use that money for other goals, such as setting aside funds or investing. You'll also have the peace of mind that comes from owning your home outright, even if your financial situation changes.
Frequently asked questions
Reporting was also provided by Erik Martin
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