What happens when you pay off your mortgage?

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 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.

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 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 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 use the extra money

Once you pay off your mortgage, you’ll find yourself with some extra cash on hand. Some ways to purpose the sums that once went toward your monthly payments might include:

• Paying off any high-interest debt, such as credit card balances.

• Boosting your retirement savings by upping your contributions to your 401(k) or IRA.

• Cushioning your emergency fund: Experts recommend keeping three to six months’ worth of living expenses for emergencies. Here’s your chance to boost that savings account.

• If you haven’t started investing in earnest, consider putting a portion of your (former) mortgage payment into a brokerage account and letting it grow over time.

• Consider making home improvements that will add to the value of your property, such as a kitchen or bathroom remodel or roofing or siding replacement.
• Contribute to a 529 college savings account. You can establish one for a child, younger sibling or other family member; in many states, the contributions are tax-advantaged.

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, how you’re utilizing it and whether you have a history of late payments.

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. Two ways to pay off your mortgage faster include prepaying the principal and refinancing to a new loan.

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 outstanding principal, you save money by reducing interest costs over the life of the loan, and you pay down the principal amount faster. This method can help you pay off your mortgage sooner.

A few strategies for prepaying the principal amount of your mortgage include paying a larger sum each month or making biweekly payments. If you inherit money or another cash windfall comes your way, you could also use it to pay a larger chunk of the principal amount.

It is very important to specify to your loan servicer that any extra mortgage payments are for the principal only. Most servicers allow you to earmark payments for principal amounts, but if you don’t let them know the extra payments are for the principal, they will simply go toward your next mortgage payment.

If you decide to prepay, just be sure your lender or servicer allows these kinds of payment plans — some impose a prepayment penalty — and that the additional funds are being applied to the loan’s principal (not the interest).

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.

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
• For a cash-out refinance, whether refinancing will cut down your equity stake, causing private mortgage insurance to kick in

Some reasons 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 if your credit score has dropped, which would impact your ability to get the lowest possible rate on the new loan. Or, of course, if prevailing interest rates are much higher than your current one.

Considerations for paying off your mortgage early

The more money you dedicate to paying down your mortgage, 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. 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.

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.

Contact your tax assessor or local housing office to find out whom to reach out to about paying property taxes, and your insurance carrier to schedule payments after you’ve paid off your home.