Paying off your mortgage is a major milestone — 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.
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’ll likely send you a cancelled promissory note, which is the document you signed as a promise to pay back your home loan when you first obtained it. The cancelled document indicates that you’ve fulfilled your obligation to repay the mortgage.
You may also receive a certificate of satisfaction indicating you don’t owe anything else on your house.
When a mortgage is fully repaid, a lot of lenders also notify the county or city recorder that the borrower is now the only title holder of the residence. This process may take several weeks, so you should check with both your lender and local recorder’s office that the necessary documents have been filed and the deed has been fully released to you.
Some lenders may leave this paperwork to you, however. In that case, you’ll have to contact your recorder’s office to remove the mortgage lien the lender placed on your home.
In order to avoid complications, when you near the end of your loan term, ask your lender about its practices and prepare for any measures you may have to take on your own. While your lender may help you obtain your deed, it likely won’t assist you with other offloading processes, such as taking on property taxes and homeowners insurance.
During the life of the mortgage, your lender collected funds from your monthly mortgage installment in an escrow account to cover your property taxes and homeowners insurance. Once you make your last mortgage payment, if there’s any money left in escrow, your lender will send it back to you — but, you’ll have to inform your insurer that you’ll be making payments moving forward.
It’s also important to remove your lender from your homeowners insurance policy, as any named policy holder can receive reimbursement in the event of property damage or injury.
For property taxes, it’s crucial to remember when you have to pay them because your lender is no longer making those payments for you once you’ve satisfied your mortgage debt. Some jurisdictions levy taxes yearly or semi-annually, while others do it quarterly.
What to do with the windfall
Once you pay off your mortgage, you’ll find yourself with some extra cash on hand. Some ways to purpose this might include repaying any high-interest debt, such as credit card balances, or boosting your retirement savings. In 2021 you can contribute up to $19,500 to your 401(k) and up to $6,000 to your Roth IRA. If you’re aged 50 or older, you can also make catch-up contributions: $6,500 to your 401(k) and $1,000 to your Roth IRA.
You may also want to consider adding more to your emergency fund. Experts recommend keeping between three to six months’ of cash on hand for unexpected expenses.
Whatever use you find for your freed-up cash, keep in mind that your credit score may suffer a dent once you repay your mortgage, especially if it was the only installment debt you carried. In some cases your score can improve, depending on what other kinds of credit you’ve borrowed and how you’re utilizing it, and whether or not you have a history of late payments.
Is it a good idea to prepay?
Prepaying your mortgage can help you pay it off in full quicker, and save on interest over the life of the loan.
The more money you dedicate to paying down your mortgage, however, the less you have to spend on something potentially more lucrative. Although it can provide an immense emotional benefit, your home is a long-term investment with a relatively low return, and there are other investments that can yield higher payoffs, such as certain mutual funds and dividend-paying stocks.
By delaying paying off your mortgage, you’re also able to tap the tax benefits for longer.
There are various strategies to prepay your mortgage, including making biweekly mortgage payments, adding a little extra every month to your payment or contributing lump sums on occasion.
If you do decide to prepay, just be sure your lender allows these kinds of payment plans — some impose a prepayment penalty that could eat into your savings — and that the additional funds are being applied to the principal of the loan.
Should you refinance instead?
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 with the goal of paying off your mortgage faster, lowering the total amount you owe.
To gauge whether refinancing is right for you, consider:
- How much you can lower your interest rate — generally one-half to three-quarters of a percentage point represents worthwhile savings
- How many years you have left on your mortgage, and/or how long you plan to live in your home
- How soon you’ll break-even on closing costs
- Whether refinancing will cut down your equity, causing private mortgage insurance to kick in
Some reasons to opt not to refinance might be if your outstanding loan balance is minimal (in other words, you only have a few years left of repayment), or your credit score has dropped, which would impact your ability to get the lowest possible rate.
While there are new obligations to take on once you pay off your mortgage, including paying homeowners insurance and property taxes, owning your home free and clear carries both financial and emotional rewards. However, it may not always make sense to prepay your mortgage to get there, especially if interest rates are low, so consider your priorities and the pros and cons.