What Really Happens When You Pay Off Your Mortgage?

Losing your mortgage is a significant achievement: You completely own your home without any debts.

So now what?

This is a time for celebration, yet it involves particular procedures as well—such as confirming your status as the complete legal owner of the property. Additionally, make sure that both the homeowners insurance premiums and property tax payments remain up to date.

Let’s examine what occurs once you’ve paid off your mortgage and the steps you should take next.

What occurs once you’ve paid off your mortgage?

Below are several steps you should consider taking after paying off your mortgage.

Gather papers from your loan servicing company.

Once you have fully repaid your mortgage, your lender or loan servicing company will typically provide you with documentation verifying that your last payment has been received and officially discharging your mortgage liability. Below are some of the papers you may get after settling your loan:

1. A letter stating that your mortgage balance is now zero.

2. An official document acknowledging full repayment.

3. Papers indicating the formal release from all obligations related to the mortgage.

• 
  A canceled promissory note:
  
  This constitutes one of several papers you would have completed during the closing process, where you agreed to repay the sum borrowed through your mortgage. The cancelled note, provided by your mortgage lender, signifies that this agreement has been honored by you.
• 
  A loan payoff letter:
  
  This document will detail (to the cent) the amount required to settle the remaining balance of your mortgage along with any outstanding interest or fees. It also confirms if you’ve fully paid everything off.
• 
  A deed of reconveyance:
  
  This document serves as a lien release indicating that your mortgage lender no longer holds any legal claim over your property.
• 
  Escrow funds:
  
  If there is any money remaining in your account,
  escrow account
  Once your mortgage is completely paid off, your lender will typically provide you with a check or direct deposit for the remaining balance.
• 
  Property deed:
  
  This document confirms that you are the exclusive owner of the property.
• 
  A certificate of satisfaction:
  
  The document indicating that you have fully repaid the loan for your property is issued by your local recorder or county clerk.

After obtaining them, store the papers in a protected location such as a safe or a safety deposit box.

Update your homeowners insurance

After paying off your mortgage, you’ll want to adjust your homeowners insurance policy. You can do this by taking out your mortgage company’s name from the list of insured parties.
mortgagee clause
, which grants them a refund if the property gets damaged or ruined.

Once your loan has been finalized, your mortgage servicing company will shut down your escrow account and send back any leftover money to you. By law, they have up to 20 business days after closing the account to provide this refund. Following that, you’ll need to handle the payment of your homeowner’s insurance independently.

Even though it’s not mandatory to keep homeowners insurance after paying off your mortgage, it is still advised.

Cover your own property tax obligations

You’ll have to arrange to get your bills sent to you.
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 you might face several invoices originating from different bodies such as school districts, fire departments, and utility providers including those for sewers and water services. For help with pinpointing all pertinent taxation agencies, check out the resources available through the municipal offices located within your town or city hall.

Get in touch with 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, this might possibly raise 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
• Boost your deposits into your retirement savings accounts.
• Boost your emergency savings
  , ideally in a
  high-yield savings account
• Set aside funds for a child’s higher education costs
• 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 dip somewhat due to less diversity in your loan types—meaning you now have fewer kinds of debts. Additionally, since account longevity plays a role, and considering how long you’ve had your mortgage, this could also cause a minor reduction in your credit rating.

On the other hand, the lower your mortgage balance, the lower your credit utilization. So paying off your mortgage can also have a positive impact on your credit. And you may be able to increase your existing credit lines if you inform your credit card companies that you’re no longer paying on your mortgage.

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 could mean that your credit score may not be updated immediately following your last payment.

Once you have paid off your mortgage, continue monitoring your credit report until the account appears as closed. Should several months pass and the account remains listed as open across all three credit reporting agencies, reach out to your lender and request they inform the bureaus accordingly.

Ways to Accelerate Mortgage Repayment

If you’re looking to accelerate the payoff of your mortgage, you primarily have two choices:

1. 
   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 outstanding balance decreases. You have several options: making an additional full-payment once; opting for more frequent biweekly installments that collectively result in one extra annual payment; or simply boosting each monthly installment with the excess directly applied to the mortgage’s principal.
2. 
   Refinancing:
   
   Rather than opting for prepayment, you have the option to refinance your loan, essentially exchanging your current mortgage for a fresh one. By refinancing, you might be able to repay your mortgage faster if you opt for a shorter loan duration—such as switching from a 30-year mortgage to a 15-year one with the new terms. However, this approach will raise the amount of each installment, although you may mitigate this effect if you secure a lower interest rate.
   lower interest rate
   on the new loan.

Is it advisable to pay off your mortgage ahead of schedule?

Certain borrowers opt to eliminate their mortgage sooner to cut down on interest expenses and increase their monthly liquidity. Nonetheless, this strategy may not be ideal, particularly if financial resources are available.

If you repay your mortgage ahead of schedule, you lose access to those readily available funds which might otherwise be used for other investments.

As per Greg McBride, CFA, and the head of financial analysis, “Instead of locking away funds in an illiquid investment like real estate, which might not be accessible during times of need, consider alternative options. For instance, prioritize paying down high-interest debts such as credit card balances or personal loans. Additionally, enhance your retirement savings through increased contributions to your company’s 401(k) plan or by funding an IRA account. Another wise move would be to bolster your emergency fund.”
invest
For other financial objectives such as funding your child’s education or investing via a brokerage account.”

You ought to 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 spend money that could be more useful in your emergency savings.

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 at higher percentages. According to McBride, “Prioritizing prepayment of your mortgage becomes relatively less important when you’re enjoying such attractive rates below 4% or even 5%.”

If all your other financial responsibilities are well-managed, accelerating the repayment of your mortgage could be beneficial. Regardless of when you finish paying it off, after eliminating your monthly mortgage obligation, you can redirect those funds towards savings and investments instead. Additionally, having full ownership of your home will provide peace of mind should your financial situation alter unexpectedly.

Frequently asked questions

Additional contributions by Erik Martin