What Happens When You Pay Off Your Mortgage?

What Happens When You Pay Off Your Mortgage?

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Paying off your mortgage is a momentous event, and one that should be celebrated. However, before popping open the bubbly, it’s important to know what happens when you pay off your mortgage to avoid any unpleasant surprises. This includes obtaining the proper payoff documents, closing out your escrow account, and making sure you redirect your tax and homeowners insurance bills so you don’t miss a payment.

What documents do you get after paying off a mortgage?

After paying off your mortgage, you should receive several documents from your mortgage lender stating the loan is paid in full. The first document is the release of mortgage, or release of deed, that states there is no longer a lien on your house, says Wayne Brown, senior partner of Dugan Brown, a financial planning firm in Dublin, Ohio.

You also should receive canceled loan documents such as a promissory note, he says. "This allows you to prove that you have, in fact, paid off the loan in full, even if you do not yet have the release of mortgage," Brown says. In addition, you should receive a certificate of satisfaction along with a statement saying your balance has been paid in full, he says.

THINGS YOU SHOULD KNOW

While the mortgage lender often files the necessary documents to release the lien on your house, that’s not always the case. To verify the lien has been removed, call your local county clerk or registrar for confirmation. It’s possible you may also find the information online, but you may have to go in person to the local courthouse and search the real estate property records yourself. Make sure to get a copy of the cancelled lien for your records.

If the lien has not been removed, show the clerk your certificate of satisfaction stating your balance has been paid in full. The clerk will file these documents, which will remove the lien from your property.

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You also should verify your mortgage is listed as paid on your credit report. If your credit report states the loan is still outstanding after a reasonable amount of time, you should file a dispute with the credit-reporting agencies and, if necessary, the Consumer Financial Protection Bureau (CFPB).

What to do after paying off your mortgage

After paying off your mortgage, there are some additional steps you must take to close out the mortgage.

1. Stop any automatic payments to your mortgage lender.

"Too often, people forget that they had automatic payments set up to pay down their mortgage, so it is important to make sure these are stopped so unnecessary payments aren’t made," Brown says.

2. Close out the escrow account, and redirect any related billings.

If you have a balance in your escrow account, make sure it is refunded to you. Also, you need to make sure all future property tax and homeowners insurance billing statements come to you, not your mortgage lender.

"Contact your tax collector, and make sure you receive property tax statements moving forward instead of the institution that held your mortgage," Brown says. "Contact your insurance company, and let them know that you’ll be paying the bills directly from now on so they can remove any third parties from your policies."

3. Budget for property taxes and homeowners insurance.

While your home is now paid for, you still have to pay for property taxes and homeowners insurance coverage each year. Adjust your budget accordingly to ensure you have the funds necessary to pay these annual expenses. Don’t overlook additional coverage you may need, such as hurricane or flood insurance.

4. Pay off remaining debts.

If you carry other debts such as car loans, credit card balances, student loans or other personal loans, use your freed-up funds to pay these debts as soon as possible. Not only will you save money in the form of reduced paid interest, but you also will increase how much disposable cash you have, which can be directed to your savings goals.

5. Increase your savings.

Now that you have some extra cash on hand, you can direct this money to your retirement accounts or set up a savings account for those financial goals that you pushed aside until now. This could include paying for a once-in-a-lifetime vacation, purchasing a vacation home or buying that dream car.

Pros and cons of paying off your mortgage

Although paying off your mortgage can seem like a huge relief, there could be some downsides to sending in that final payment.

Pros

  • You’ll have an increased cash flow. The money you were sending your mortgage lender can now be used for other expenses. You also can use that money to build up your retirement savings or invest in new opportunities.
  • You can secure a home equity line of credit (HELOC). With your home paid off, you can leverage the equity in the event you need emergency funds or have to pay for major home repairs.
  • You’ll no longer pay interest on the mortgage loan. For every month you make a payment on your mortgage, you also pay interest. Paying off your mortgage, especially if you pay it off early, could mean saving thousands of dollars in interest.

Cons

  • You could have less liquid funds. "Using a large amount of money to pay off a mortgage early may not only make you less liquid, but it may also result in an opportunity cost elsewhere, such as an investment that could grow faster than the rate on your mortgage," Brown says.
  • You lose the tax deduction for mortgage interest payments. Once your mortgage is paid in full, there no longer is any interest to deduct on your tax return. This could result in either a decreased tax refund or an increased tax payment.
  • You may have to pay a penalty for paying off your mortgage early. Before sending in that payoff check, review your mortgage loan payments to see if you will be charged a penalty for paying off the loan early. If so, this fee should be considered when deciding if paying off your mortgage is a good financial move.

How to pay off your mortgage faster

If you decide to pay off your house early, there are several ways to help you achieve that goal.

  • Increase your monthly payment. If you have extra cash to put toward your mortgage, add it to your monthly payment. However, make sure the extra cash is applied to the principal only. This will help decrease how much you owe, reducing the amount of interest you pay over the life of the loan.
  • Apply any cash windfalls to your mortgage. If you get a bonus at work or receive a tax refund, pay this amount on the mortgage principal. Like the extra cash you pay each month, this will help reduce the amount you owe, thus reducing the amount of interest you pay.
  • Refinance your mortgage. If interest rates are lower than what you currently have on your home loan, you could refinance your mortgage for a lower interest rate that could reduce your monthly payment. You could continue paying the same amount as your previous mortgage, but now you have more money going to the principal. It’s also possible you may be able to refinance for a shorter repayment term, which could save you thousands in interest.
  • Ask for a modified mortgage loan. With a loan modification, you simply adjust the terms of your current mortgage loan instead of applying for a new mortgage like with a refinance. You could receive a lower interest rate, and any extra cash you have available could be applied to the principal. However, loan modifications usually are reserved for homeowners experiencing financial hardship, so not everyone will qualify to receive one.
  • Apply to recast your mortgage. When you make a large lump-sum payment on your mortgage — perhaps through money from an inheritance or a bonus at work — your mortgage lender may change the monthly payment and interest rate on your loan based on the new, lower principal amount. This could free up extra money to pay toward the principal.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.