When you pay off your mortgage, take these steps to smooth the financial path as you assume full ownership of your home:
Paying off your mortgage is cause for celebration. Before you pop the Champagne, however, take these steps to smooth your financial path to full homeownership.
Paying off your mortgage is a major financial milestone. After years of making monthly payments you finally own your home outright. But what exactly happens when you make that last payment? Here’s an overview of what to expect.
You’ll Get Confirmation From Your Lender
Once you pay off your mortgage loan, your lender will send you documentation confirming that you have paid the loan in full. This paperwork is proof that you now own your home free and clear. Here are some of the documents you can expect to receive:
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Canceled Promissory Note: This shows your mortgage has been completely paid off and you have fulfilled the loan terms.
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Loan Payoff Letter: Provides details on your final payoff amount, including interest and fees. It will show a $0 balance if the loan is paid in full.
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Lien Release Formally removes your lender’s legal claim to the property
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Mortgage Satisfaction: Recorded with the county and proves your mortgage is satisfied.
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Final Mortgage Statement: Shows a zero balance, signaling the loan is closed.
Be sure to store these documents in a safe place, like a safe deposit box.
You’ll Need to Pay Taxes and Insurance
If your lender managed your home insurance and taxes via an escrow account that account will close once your mortgage is paid off. The lender will refund any leftover escrow funds to you. But going forward, you’ll need to pay these costs yourself.
You’ll get a bill directly from your homeowners insurance company now. And you’ll be responsible for paying your property taxes on your own, either annually or in installments. Contact your local tax office for details.
Your Credit Could Be Impacted
Paying off your mortgage generally won’t drastically alter your credit scores. The biggest factor is that your credit mix will change – you’ll no longer have an open home loan. This could cause a small temporary dip in your scores.
On the positive side, your credit utilization ratio may improve, since your total loan balances will decrease significantly. Make sure to check your credit report a couple months after your final payment to ensure your mortgage shows as paid off.
You May Need to Adjust Your Taxes
Without mortgage interest to deduct, your tax situation could change once your home loan is paid off. Notify your accountant, who can suggest strategies to make the best use of funds you previously spent on your mortgage payment.
For example, you may be able to increase retirement contributions or pay down higher interest debts faster. Discuss your new options with a tax professional.
It’s Time to Realign Your Finances
Completing mortgage payments usually frees up a chunk of monthly cash. Make sure you cancel any automatic payments to your lender. And realign your budget without the mortgage line item.
Look for opportunities to boost savings, pay down other loans, or spend on things you’ve put off until after becoming mortgage-free – like travel or home remodeling. If you’re not sure how to optimize your new financial situation, consider meeting with a financial advisor.
Other Details to Handle
Here are a few other things to take care of once you’ve paid off your home:
- Store your property deed in a safe place as proof of ownership.
- Keep your title insurance policy in case title disputes arise later.
- Save all home buying paperwork, like your HUD-1 settlement statement.
- Preserve records of home improvements to show cost basis.
- Change insurance and tax bills to come directly to you instead of the lender.
- Update your homeowners insurance by removing the mortgagee clause.
- Set aside money for insurance premiums and property taxes.
How Payoff Impacts Your Home Equity
Owning your home free and clear means you have built up 100% equity in the property. This equity can be tapped in a few ways if you need access to cash.
You can take out a home equity loan or HELOC against the equity. Other options are getting a reverse mortgage or doing a shared equity deal with an investor. Or you can sell the home to get your full ownership stake in cash.
Should You Pay Off Your Mortgage Early?
Deciding whether to pay off your mortgage ahead of schedule comes down to your financial situation:
Pros of early payoff:
- Frees up cash flow each month
- Saves on total interest costs
- Builds home equity faster
- Provides security if your income drops
Cons of early payoff:
- Reduces liquidity and cash reserves
- May miss out on better investment returns
- Loses the mortgage interest tax deduction
- Could limit ability to borrow for other needs
Crunching the numbers for your specific scenario can help determine if early mortgage paydown makes sense. But either way, becoming mortgage-free gives you more ownership of your home.
Celebrate Your Achievement
Regardless of when you pay it off, completing your mortgage payments is a big feat. After tying up financial resources on your home for so long, it’s time to celebrate this money milestone.
Splurge on a vacation, or save the extra funds for other goals. But make sure to commemorate this achievement and the exciting possibilities it brings for your future finances.
The Road Ahead Without a Mortgage
Owning your dwelling free and clear is a dream for many homeowners. While paying off your home loan takes diligence, the benefits are well worth the effort.
Without a mortgage obligation, you can more easily weather job losses and recessions. And you can reallocate former mortgage payments to accumulating wealth. Enjoy your new financial freedom!
You’ll Need to Update Your Insurance and Taxes
In addition to covering the installment on your home loan, your monthly mortgage payments likely collected funds used to pay for homeowners insurance coverage and your annual property taxes. If so, the portion of each payment allocated to insurance and taxes was stored in an escrow accountâa dedicated bank account set up for that purposeâfrom which the loan servicer would pay taxes and insurance premiums on your behalf.
When you have paid off your mortgage in full:
- Your escrow account will be closed. Any funds remaining in the account will be returned to you. The mortgage servicer is obligated by law to send you your escrow refund, if any, within 20 days after it closes your account.
- Youll become responsible for paying your home insurance. Mortgage lenders require you to carry property insurance to protect themselves in case your houseâwhich is also collateral on their loanâis damaged or destroyed by fire, natural disaster or other calamity. Once your mortgage is paid off, youre no longer compelled to carry insurance coverage, but its wise to do so. If you want to continue with your current coverage and provider, notify them that they need to bill you directly, rather than through your loan servicer. Ask them to remove your mortgage lender as a payee or beneficiary on the policy.
- Youll be responsible for your property taxes. You should also notify any local authorities that issue property taxes that they need to bill you directly from now on, rather than go through your mortgage servicer. Depending on your location, you may just have a single annual property tax bill (typically collected by your county, town or city) or multiple bills payable to entities such as school districts, water and sewer districts and/or fire departments. The clerks office at your town or city hall can help you identify all relevant taxing authorities.
- Homeowners association fees become your responsibility (if they werent already). If you live in a townhome or condo community with a homeowners association (HOA) that collects dues or maintenance fees, your mortgage servicer may have handled those payments on your behalf as well. Youll need to let your property manager or HOA know when your mortgage has been paid off so they know to collect their fees from you directly.
Allocate Your Extra Funds
The end of mortgage payments can give you a significant amount of extra cash each month. Its wise to give careful consideration to what youll do with that extra money. Here are some ideas:
- Maximize retirement savings. If your retirement savings isnt where it needs to be, beefing up that 401(k) or IRA is a great opportunity. If youre eligible for matching contributions through an employer-sponsored retirement plan, try to save at least enough to get the maximum match available. Better still, try to sock away the maximum amount permitted by law each year (For IRAs, that limit is currently $6,500 across all accounts if youre under 50, or $7,500 if youre 50 or older. Youre limited to $66,000 in 401(k) contributions from you and your employer if youre under 50 and $73,500 if youre age 50 or older.)
- Pay off other debts. Consider using your newfound disposable income to pay off your debts such as credit card balances, student loans and personal loans. Paying down high card balances can save you interest charges and help your credit scores by reducing your credit utilization rate. You also may be able to reduce interest costs and/or shorten your repayment terms by paying installment loans off ahead of schedule.
- Expand your emergency fund. Financial experts recommend having at least three to six months of living expenses saved in an emergency fund. That ensures when lifes unexpected expenses pop up, such as a broken refrigerator, surprise medical bill or a last-minute flight for a family emergency, you can pay for it rather than going into debt.
- Work toward other savings goals. Whats on your financial wishlist? A once-in-a-lifetime travel adventure? Buying an investment property or vacation home? Setting aside some of your former mortgage payments can help realize your goals. A dedicated account for these purposes can help prevent temptation to spend your extra cash on other things before you make your dreams come true.
- Start investing. If your retirement savings are in good shape, you can still put your former mortgage payments to work for you by pursuing other types of investment for long- or shorter-term goals. Consider working with a financial advisor or opening a brokerage account and buying stocks, bonds or mutual funds on your own, according to your risk tolerance. Investing in the stock market can bring much higher returns than the rates typical of checking and savings accounts, but it carries higher risk (and you shouldnt invest what youre not prepared to lose). If youre getting close to retirement, you could also invest in treasury bonds or certificates of deposit (CDs), which typically promise lower returns than stocks but carry much lower risk.
What happens when you make your last mortgage payment?
FAQ
What happens after paying off your house?
Paying off your mortgage means that you have 100% equity in your home and no longer have to make monthly loan payments to your lender. Once your loan is paid off, you’ll have to pay your home insurance premiums and property taxes out of pocket, instead of through an escrow account.
Is it smart to completely pay off your house?
If you own a home, it’s often thought that you should pay off your mortgage as quickly as possible. This is often advisable. A mortgage is frequently the largest amount of debt most people will ever owe, and even a terrific interest rate adds up quickly. So all things being equal, it often is wise to pay that off.
What happens to the title when you pay off your mortgage?
A deed of reconveyance is a document that proves you’ve paid off the mortgage on your home. It represents the transfer of the title to your property from your mortgage lender to you. Over the time you repaid your mortgage, you legally owned the property, but the lender held the mortgage lien — or claim — to it.
What happens when a house is paid off?
Once your mortgage is paid off, you’ll receive a number of documents from your lender that show your loan has been paid in full and that the bank no longer has a lien on your house. These papers are often called a mortgage release or mortgage satisfaction.
What happens after you pay off your mortgage?
After you pay off your mortgage, you might gain a newfound sense of pride in your home. You really, truly own it. You’ll likely have extra money every month and face a much lower risk of losing your home if you fall on hard times. You may need to do more than make your final mortgage payment to finalize your new free-and-clear ownership status.
Should you pay off your mortgage?
Paying off your mortgage is cause for celebration. Before you pop the Champagne, however, take these steps to smooth your financial path to full homeownership. Paying off your mortgage is a huge accomplishment. You’ve finally reached the finish line after years of making monthly payments. Now you own your home free and clear! But what happens next?
How long does it take to pay off a mortgage?
When you pay off a mortgage, the original deed of trust is sent back to you by the mortgage holder marked “paid” or “cancelled.” This process usually takes up to 60 days, but because deeds are public records, you can check on the progress with your county registrar. Why you shouldn’t pay off your house early?
What happens after I make a final mortgage payment?
After you make your final mortgage payment, your loan servicer typically sends you a packet of papers, known as the mortgage release or mortgage satisfaction document, attesting to the fulfillment of your loan contract and the removal of the lenders lien on your house. The packet typically includes:
How do I know when to pay off my mortgage?
Have your loan number handy. You’ll find it on your mortgage statement. The payoff quote will say exactly how much principal and interest you need to pay to own your home free and clear. It will also provide a date for when you need to pay it off. If you take longer, it’s not a big deal. You’ll just owe more interest.