What Happens When You Pay Off Your Mortgage? (2024)

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. Learn more about what’s supposed to happen when you pay off your mortgage to make sure you’re fully off the hook.

What To Do After Paying Off Your Mortgage?

Before you can make your final mortgage payment, you’ll need to ask your loan servicer for a payoff quote. You can often do this through the servicer’s website while logged into your home loan account. If not, you can call them. 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.

You may have to pay some fees with your final mortgage payment that are often meant to release final paperwork, like proof to the county that you now own the home. But there can also be fees if you’re paying off the loan earlier than the original term.

If you decide to make extra payments on your mortgage, it’s important to tell your lender to direct those funds to the principal balance of the loan. And ask your lender ahead of time what fees you might incur when paying off the rest of your loan.

Your payoff statement should also note whether you need to make your final payment via wire transfer, bank check (cashier’s check) or certified check, any of which will incur a small fee. If it doesn’t, ask whether a personal check or ACH transfer is acceptable.

What Documents Can You Expect?

The documents you receive may depend on your loan servicer. Here’s what you can expect, which documents are essential and which ones you can make do without.

• Canceled promissory note (“note”). A promissory note states that someone promises to pay something—in this case, a mortgage. You may or may not receive this document. It’s probably okay if you don’t, as long as you have other proof that you’ve paid off your loan.
• Deed of trust or mortgage deed (“deed”). A deed is an official document showing that your lender has a right to your home if you stop paying the mortgage. This is another document your servicer may or may not send you when you pay off your home. It’s also possible your servicer will send it only to the government office of records where your deed was originally recorded.
• Certificate of satisfaction. Your local office of records (the county recorder, county clerk or another department depending on where you live) will record a certificate of satisfaction once you or your loan servicer provides official documentation of your loan being paid off. Expect to pay $25 to $50 for this service. It may be one of the fees on your loan payoff statement. This is a document you definitely want for your records.
• Final mortgage statement. It’s free and easy to get your final mortgage statement showing that you don’t owe any principal, interest or fees. Hang on to this one, too, as proof of full repayment.
• Loan payoff letter. Your loan servicer might send you an official letter memorializing that you’re done paying off your loan. Again, it’s okay if they don’t, as long as you have other evidence.

If you don’t have proof within about 90 days that the certificate of satisfaction has been recorded, you may need to contact your loan servicer and speak with the lien release department.

Steps To Pay It Off

Here’s a quick summary of what’s involved in making your final mortgage payment.

1. Request a payoff quote from your mortgage servicer.
2. Make the final payment in the amount of the quote, following any special instructions such as paying via wire transfer. Your payoff quote will only be good through a certain date, so try not to miss the deadline.
3. Receive documents verifying your loan repayment.
4. Make sure your payoff is recorded with your local government and get a copy of that record.

How It Affects Your Credit

Your credit score is unlikely to change much after paying off your mortgage. Your payment history and amount owed have already been factored into your credit score for years.

However, if you’re paying off a large lump sum (maybe you got an inheritance or life insurance settlement), the effect on your credit may be more noticeable. Your amounts owed, as shown on your credit report, will suddenly be much lower, and that metric is a big component of your credit score, accounting for about 30% of it. In that case, you might see a nice bump. But if you already have excellent credit, the effect may be negligible.

You also should check your credit report after 30 to 60 days to make sure it shows your mortgage was paid off. You can get a free credit report from each bureau every 12 months at AnnualCreditReport.com.

Pros and Cons of Paying Off Your Mortgage

As with most financial decisions, there are two sides to paying off your mortgage in full. While doing so has obvious benefits, there are also reasons why you might want to direct extra money to other parts of your budget.

Pros

• Elimination of a large monthly payment
• Savings on interest, if paid off early
• More home equity that can be tapped if needed in the future
• Peace of mind that comes with owning a home outright

Cons

• Loss of mortgage interest tax deduction, if you itemize deductions
• Possibility of prepayment penalty, if loan is paid off early
• Money used for extra payments could earn more if invested elsewhere
• Ties up a portion of your wealth in an illiquid asset

Other Steps To Take After Paying Off Your Mortgage

Unfortunately, collecting mortgage paperwork isn’t the only task you’ll need to handle. Here’s what else you’ll need to do after paying off your mortgage.

• Cancel automatic payments. Make sure to stop any automatic monthly mortgage payments you may have set up. You don’t want to make an unnecessary payment and have to wait for a refund.
• Get your escrow refund. If you still had a mortgage escrow account when you paid off your loan, make sure you get a refund of any remaining balance. You should get it automatically within 20 days of paying off your loan. If not, contact your loan servicer.
• Contact your tax collector. If your local tax collector has been sending property tax statements to your mortgage servicer because of your escrow account, let them know they don’t need to do that anymore. All statements should come to you.
• Contact your insurance company. Again, if you had an escrow account, let your insurance company know that you’ll be paying the bills directly now and have them remove your loan servicer from the policy. You should also do the same for any other insurance coverage, like if you have a flood policy in addition to homeowners insurance.
• Set aside your own money for taxes and insurance. Paying off your mortgage doesn’t relieve you of your property tax obligations, and it’s a good idea to keep your homeowners insurance in place for financial protection. Remember, it not only protects your home’s structure; it also protects the contents and your personal liability. If you have coverage for perils like floods or earthquakes, you’ll probably want to keep those.
• Keep all important homeownership documents. In addition to the ones related to paying off your mortgage, you’ll want to keep your HUD-1 or closing disclosure that shows how much you paid for the property. If you ever sell it, you’ll want records of your cost basis for income tax purposes. Keep records of your home improvement expenses for the same reason.
• Hang on to your title insurance. Keep your owner’s title insurance policy if you purchased one. Just because you’re mortgage free doesn’t mean there’s no possibility of an undiscovered title defect causing problems for you later.

How To Pay Off Your Mortgage Faster

There are several ways to pay off your mortgage early.

• Pay extra principal each month. This can be a straightforward way to shrink your mortgage faster. It might be your best option if your income and expenses are similar from month to month. Just remember to have the lender direct those payments to the principal balance so you’re not also paying the interest.
• Pay extra principal each year. Some people use an annual bonus or tax refund to put extra money toward their mortgage principal.
• Make biweekly mortgage payments. Sending half of your mortgage payment every two weeks can save money on interest and speed up the repayment process. You’ll end up making an extra payment each year if you use this strategy.
• Refinance to a lower rate, shorter term or both. Either of these options will save you money on interest, which can help you pay down principal faster.
• Recast your mortgage. Mortgage recasting may be a good choice if you want to pay down several thousand dollars of principal and lower your monthly payment without refinancing.

Where To Put the Funds

You’ve probably already been daydreaming about how you’ll use that extra cash every month. But if you need some ideas for how to use the money that’s no longer going toward a monthly mortgage payment, here are a few.

• Celebratory vacation. Or maybe travel’s not your thing. The point is, you’ve achieved something huge, and you should mark the occasion with something extra special that fits your budget.
• Retirement. Most of us haven’t saved enough; now’s your chance to make more progress. If you’re 50 or older, you can take advantage of catch-up contributions. Besides contributing more to tax-advantaged retirement accounts, you may also want to pad your emergency fund for retirement.
• Home improvements. It can be hard to afford something like a kitchen remodel when you’ve got a big mortgage payment—especially if you don’t want to borrow more with a home equity loan or line of credit. Those improvements might be within reach now.
• Aging in place upgrades. Are you living in your forever home? Making some accessibility upgrades well before you actually need them might be a smart investment. The time to widen the entrance to your bathroom is before you’re in a wheelchair. A grab bar in your shower might save you from breaking a hip.
• Other debt. Most people pay off other debt before their mortgage because the other debt usually has a higher interest rate. But if you have a credit card, personal loan, car loan or something else that’s costing you money every month, now’s your opportunity to get rid of it sooner.
• Children’s or grandkid’s education. A 529 plan will give you tax benefits that can make it easier to pay for private school or college.

Life After Your Mortgage Is Paid Off

Once your mortgage is paid off, you might have room in your budget to focus on other financial priorities. You may be able to pay down other debt, save for retirement or splurge on luxuries.

However, paying off your mortgage isn’t the end of your house-related bills. You’ll still need to pay property taxes to avoid a foreclosure and you should keep your homeowners insurance in effect to guard against unforeseen disasters. Maintaining a dedicated fund for repairs and upkeep is also important.

If you need extra money in the future, you can tap into a paid-off property using a home equity loan or line of credit. But for now, revel in the fact that you have one less bill to pay and that the roof over your head belongs to you free and clear.

Should I Pay Off My Mortgage or Invest?

Perhaps the most compelling reason not to pay off a mortgage early is that it might be better to put that extra money into stocks, a high-yield savings account or a certificate of deposit (CD).

For instance, if your mortgage has a 3% interest rate, but you could earn 5% in a CD or 7% in a mutual fund, then you would come out ahead by investing your money. The problem is that many investments don’t provide guaranteed returns so it can be hard to say with certainty which option is better.

When weighing the decision to pay off your mortgage or invest, consider the following:

• The interest rate on your mortgage
• The potential gains you might earn from an investment
• How much liquidity you need in your assets
• Whether you receive a tax deduction for mortgage interest
• Any other incentive you may receive for investing, such as an employer match for 401(k) contributions

Frequently Asked Questions (FAQs)