What Happens When You Pay Off Your Mortgage?

Paying off your mortgage is a big milestone. You can own your home freely and clearly.

So what do you do now?

It’s a moment to celebrate, but it’s also a moment that comes with certain steps, such as making sure you have proof that you are the full legal owner of the property. You’ll also continue to pay your homeowner’s insurance and property taxes.

Let’s take a look at what happens when you pay off your mortgage and what you should do after that.

What happens when I pay off my mortgage?

Here are some things you should do after paying off your mortgage.

Collect documents from your servicer

When you pay off your mortgage, your lender or loan servicer will likely send you documentation confirming that you have made the final payment on your loan and that your mortgage obligations are officially released. Documents you may receive after your loan is paid off include:

• Canceled promissory note: This is one of the many documents you sign at closing, promising to repay your mortgage. A cancellation letter issued by your mortgage lender indicates that you have fulfilled your promise.
• Loan repayment letter: This document shows the amount required to repay the remaining balance of your mortgage, as well as any interest or fees owed (to the nearest penny). If you have repaid everything, we will also check that.
• Reconveyance deed: This is a lien release that confirms that the mortgage company no longer has a legal interest in your property.
• Escrow funds: If you have money left in your escrow account after your mortgage is paid off, your lender may need to send you the funds by check or direct deposit.
• Property deed: This document proves that you are the sole property owner.
• Satisfaction certificate: The local recorder or county clerk will issue this document showing that you have paid off the loan on the property.

Once you have your documents, store them in a safe place such as a safe or safe deposit box.

Renew your homeowners insurance

Once you pay off your mortgage, you’ll need to renew your homeowner’s insurance. You will need to remove your mortgage company from your insurance policy. mortgagee clauseThis gives you the right to compensation if your home is damaged or destroyed.

Once the loan closes, the mortgage servicer will also close the escrow account and refund any remaining funds. Legally, the servicer must issue the escrow refund within 20 days of account closure. After that, you will be responsible for paying your own home insurance premiums.

Although you won’t need homeowners insurance once you pay off your mortgage, it’s still a good idea.

Pay your own property taxes

You will need to make arrangements to receive your invoice. local property tax Directly, since the mortgage company will no longer pay these out of the escrow account.

Depending on where you live, you may receive a single annual property tax bill from your city, town, or county, or you may receive multiple bills from different entities such as school districts, fire departments, sewer districts, etc. There are cases. Your town or city hall office can help you identify all relevant taxing authorities.

contact your accountant

Once you have paid off your mortgage, you will need to notify your accountant. I won’t have it anymore Mortgage interest deducted If it appears on your tax return, your tax liability may increase.

However, paying off your mortgage gives you cash that you can potentially use for other purposes. Your accountant or financial advisor can suggest ways to utilize the money you save. Additional funds can be used for:

Be careful with your credit score

Paying off your mortgage in full usually doesn’t have a big impact on your credit score. However, if your mortgage is removed from your credit history, your score may drop slightly because your credit mix is ​​reduced. That means getting rid of many types of debt. The age of your account is also important, and since you’ve likely been paying off your mortgage for quite some time, that can also hurt your credit a bit.

On the other hand, the lower your mortgage balance, the lower your credit utilization ratio. Therefore, paying off your mortgage can have a positive impact on your credit. You may also be able to increase your existing credit limit by notifying your credit card company that you are no longer making payments on your mortgage.

It typically takes 30 to 60 days for lenders to report closed accounts to the three credit bureaus: Equifax, Experian, and Transunion. This means your credit score may not change immediately after you make your last payment.

After you pay off your mortgage, it’s important to monitor your credit report until your account is marked as closed. If after a few months the account still shows as open at all three credit institutions, contact your lender and ask them to notify your financial institutions.

How to pay off your home loan faster

If you want to pay off your mortgage faster, you have two main options.

1. Prepayment of principal: This involves paying more towards the loan principal, reducing the total interest paid over the life of the loan and accelerating the pace at which the balance declines. You can also pay in one lump sum. Small biweekly payments add up to one additional payment per year. Or, simply increase your monthly payments (the extra amount goes toward your mortgage principal).
2. Refinance: Instead of making early repayments, you can refinance your loan by replacing your old mortgage with a new one. Shortening your loan term by refinancing can help you pay off your mortgage faster, for example if your new mortgage is 15 years instead of the 30 years of your original mortgage. However, with this strategy, the amount of each payment increases unless you get a lower interest rate on your new loan.

Should I pay off my mortgage early?

Some borrowers prefer to pay off their mortgage early to save on interest and free up cash each month. However, even if you have the funds, this may not always be the best choice.

If you pay off your mortgage early, you lose access to liquid assets that could be leveraged elsewhere.

Greg McBride, CFA, Principal Financial Analyst at Bankrate, said: It is necessary. (For example, pay off other high-cost debts such as credit cards or personal loans, increase your retirement savings by contributing to a workplace 401(k) or IRA, increase your emergency savings, invest Also for other financial goals, such as children’s education or investing through a brokerage account. ”

You should also consider your financial situation before making a decision. repay the mortgage early. Experts usually advise against Pay off your mortgage before the recession hits That’s because you’ll be using more valuable cash for your emergency fund.

Also, if your interest rate is high and your other debts have high interest rates, paying off your mortgage early may not be the best use of your cash. “Mortgage prepayments are a relatively low economic priority, especially at ultra-low interest rates of less than 4 to 5 percent,” says McBride.

However, if your other financial priorities are in good shape, paying off your mortgage early may make sense. And whether you prepay or not, once your mortgage payments are gone, you can use that cash for other purposes, such as savings or investments. It also gives you the peace of mind that your home purchase will be paid in full if your financial situation changes.

FAQ

Additional reporting by Erik Martin