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Key takeaways
- Owning your home free and clear carries both financial and emotional rewards, but it may not always make sense to prepay your mortgage to get there.
- Paying off your mortgage does not release you from home-related obligations, such as property taxes and homeowners insurance.
- Make sure to specify with your lender that the extra money you pay goes to your mortgage’s principal amount — not the interest.
Paying off your mortgage is a major milestone because you now own your home free and clear. It’s a moment to celebrate but also to take specific steps to ensure you’re the legal owner of the property and to continue paying your homeowners insurance and property taxes on your own. So, what happens when you pay off your mortgage? Find out here.
What happens when you pay off your mortgage?
When you make the last payment on your mortgage, you can expect to hear from your lender, who will likely send you documents confirming that you’ve fulfilled your final obligation toward the loan. You will want to touch base with your insurance company to remove your mortgage company from your homeowners insurance policy, ensuring you will receive any reimbursement of claims filed. If your premiums were included in your mortgage repayments, you’ll have to get another billing system set up.
Also, be sure you clearly understand your local property taxes and when they are due since your lender will no longer be paying these out of your escrow account. Make sure you or your accountant receive notifications from your state or municipality.
Once you’ve paid off your home, you’ll have some extra cash on hand, so you’ll have to consider how to best use those extra funds. Also, keep an eye out for the following documents, typically issued after paying off your mortgage.
Documents to expect after paying off your mortgage
When you pay off your mortgage, your lender will provide you with documents to show you have paid off your home loan in full. You must collect all the necessary paperwork, and in some cases, escrow funds, before you can consider yourself finished with your mortgage.
- 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 mortgage 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 is a lien release confirming that your mortgage company no longer has a legal interest in 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.
How to pay off your mortgage faster
Some borrowers like to be early birds: paying off their mortgage early — technically known as prepaying the principal — to free up cash each month and save interest over the life of the loan. However, this might not always be the best move, even in cases when you have the funds to pay off your mortgage ahead of schedule.
Where prepaying a mortgage has a bigger impact is if you have a modest remaining balance and paying off the loan will suddenly eliminate your biggest monthly payment. But only do this if you've covered other bases such as paying off high-cost debt, fully funding emergency savings and maxing out your retirement contributions.— Greg McBride, Bankrate Chief Financial Analyst
If you decide to pay off a mortgage early, here are two ways to achieve that goal:
- Prepaying the principal: Monthly mortgage payments go toward paying down the principal amount on your loan and interest (plus taxes and insurance) when you prepay the principal. This approach could include making a lump sum payment if you come into a windfall or making biweekly payments on your mortgage, which amounts to one extra mortgage payment every year.
- Refinancing into a new loan: Instead of prepaying your mortgage, you may be able to refinance the loan to take advantage of lower rates and benefit from the equity you already have in your home. While many borrowers refinance to lower their monthly payments, defray other debt or pay for things like home renovations or college tuition, you can also refinance to a shorter loan term to pay off your mortgage faster and lower the total amount you owe.
It’s important to consider, however, that the more money you dedicate to paying down your mortgage, the less you have for other financial needs and goals.
“Prepaying your mortgage is a comparatively low financial priority, especially if you have one of those ultra-low, sub-4 or 5 percent rates,” says McBride. “There are a lot of other things you can do with the money rather than tie it up in an illiquid asset like a home where you can’t get to it when you need it. [For example, you can] pay off other higher cost debt such as credit cards or personal loans, increase your retirement savings by putting more into your workplace 401k or contributing to an IRA, boost emergency savings, invest for other financial goals like children’s education or invest through a brokerage account.”
Another consideration: Many mortgage lenders bundle financial responsibilities like property taxes and home insurance into monthly payments. Even if you pay your mortgage early, you will still need to pay property taxes. And while you will not be required to carry home insurance (as you did with a mortgage), you should highly consider keeping it.
Mortgage payoff FAQ
Paying your mortgage in full usually does not have a significant impact on your credit score. But once the mortgage is removed from your credit history, your score may drop slightly because of a reduced credit mix, which is an important part of your overall score.
Your mortgage servicer is required to return any money left in your escrow account within 20 days of you paying back your mortgage in full, and it will close the escrow account.
You can use the money you save by paying off a mortgage early in various ways, including to pay off other debt, make increased contributions to your retirement savings or boost your emergency savings account. You could also use the funds for home improvements or to save money for a child’s college education expenses.
Once you pay off your mortgage, it can take a few weeks to receive the mortgage discharge document. Because it is filed with your local government, the process all depends on where you live, local laws and demand.
After you pay off your home, you can get your equity in a few different ways. You can sell your home to get its current market value, or you can access equity via a home equity loan or a home equity line of credit (HELOC). Other options include a reverse mortgage, cash-out refinance and shared equity investment.
There are both pros and cons to paying your mortgage off early. While you save on interest and have extra funds to use elsewhere, you will lose the federal mortgage interest tax deduction and could miss out on more lucrative investments.
