Paying off your mortgage is cause for celebration. Before you pop the Champagne, however, take these steps to smooth your financial path to full homeownership.
1. You'll Receive Mortgage Release Documents
After you make your final mortgage payment, your loan servicer typically sends you a packet of papers, known as the mortgage release or mortgage satisfaction document, attesting to the fulfillment of your loan contract and the removal of the lender's lien on your house. The packet typically includes:
- A declaration that the mortgage has been paid in full.
- Your promissory note for the loan amount (one of the many documents you signed at your closing), marked as canceled.
Many lenders will also file a certificate of satisfaction with the municipal authority that maintains property deeds where you live. The certificate releases the deed on your home to you and indicates you are now the sole owner. Ask your loan servicer if they will do this for you. If they will, be aware that it can take a few weeks or months for the documents to be filed and updated.
Once your lender has told you they've filed the documents, contact your local records office to confirm their files indicate your mortgage has been canceled. If your lender will not file the certificate of satisfaction, you should file it yourself. Just check with your local municipal clerk's office to find out what to do.
2. You'll Need to Update Your Insurance and Taxes
In addition to covering the installment on your home loan, your monthly mortgage payments likely collected funds used to pay for homeowners insurance coverage and your annual property taxes. If so, the portion of each payment allocated to insurance and taxes was stored in an escrow account—a dedicated bank account set up for that purpose—from which the loan servicer would pay taxes and insurance premiums on your behalf.
When you have paid off your mortgage in full:
- Your escrow account will be closed. Any funds remaining in the account will be returned to you. The mortgage servicer is obligated by law to send you your escrow refund, if any, within 20 days after it closes your account.
- You'll become responsible for paying your home insurance. Mortgage lenders require you to carry property insurance to protect themselves in case your house—which is also collateral on their loan—is damaged or destroyed by fire, natural disaster or other calamity. Once your mortgage is paid off, you're no longer compelled to carry insurance coverage, but it's wise to do so. If you want to continue with your current coverage and provider, notify them that they need to bill you directly, rather than through your loan servicer. Ask them to remove your mortgage lender as a payee or beneficiary on the policy.
- You'll be responsible for your property taxes. You should also notify any local authorities that issue property taxes that they need to bill you directly from now on, rather than go through your mortgage servicer. Depending on your location, you may just have a single annual property tax bill (typically collected by your county, town or city) or multiple bills payable to entities such as school districts, water and sewer districts and/or fire departments. The clerk's office at your town or city hall can help you identify all relevant taxing authorities.
- Homeowners association fees become your responsibility (if they weren't already). If you live in a townhome or condo community with a homeowners association (HOA) that collects dues or maintenance fees, your mortgage servicer may have handled those payments on your behalf as well. You'll need to let your property manager or HOA know when your mortgage has been paid off so they know to collect their fees from you directly.
3. Allocate Your Extra Funds
The end of mortgage payments can give you a significant amount of extra cash each month. It's wise to give careful consideration to what you'll do with that extra money. Here are some ideas:
- Maximize retirement savings. If your retirement savings isn't where it needs to be, beefing up that 401(k) or IRA is a great opportunity. If you're eligible for matching contributions through an employer-sponsored retirement plan, try to save at least enough to get the maximum match available. Better still, try to sock away the maximum amount permitted by law each year (For IRAs, that limit is currently $6,500 across all accounts if you're under 50, or $7,500 if you're 50 or older. You're limited to $66,000 in 401(k) contributions from you and your employer if you're under 50 and $73,500 if you're age 50 or older.)
- Pay off other debts. Consider using your newfound disposable income to pay off your debts such as credit card balances, student loans and personal loans. Paying down high card balances can save you interest charges and help your credit scores by reducing your credit utilization rate. You also may be able to reduce interest costs and/or shorten your repayment terms by paying installment loans off ahead of schedule.
- Expand your emergency fund. Financial experts recommend having at least three to six months of living expenses saved in an emergency fund. That ensures when life's unexpected expenses pop up, such as a broken refrigerator, surprise medical bill or a last-minute flight for a family emergency, you can pay for it rather than going into debt.
- Work toward other savings goals. What's on your financial wishlist? A once-in-a-lifetime travel adventure? Buying an investment property or vacation home? Setting aside some of your former mortgage payments can help realize your goals. A dedicated account for these purposes can help prevent temptation to spend your extra cash on other things before you make your dreams come true.
- Start investing. If your retirement savings are in good shape, you can still put your former mortgage payments to work for you by pursuing other types of investment for long- or shorter-term goals. Consider working with a financial advisor or opening a brokerage account and buying stocks, bonds or mutual funds on your own, according to your risk tolerance. Investing in the stock market can bring much higher returns than the rates typical of checking and savings accounts, but it carries higher risk (and you shouldn't invest what you're not prepared to lose). If you're getting close to retirement, you could also invest in treasury bonds or certificates of deposit (CDs), which typically promise lower returns than stocks but carry much lower risk.
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4. Monitor Your Credit
A few months after paperwork is finalized and your mortgage is closed out, it's a good idea to check your credit report to ensure it accurately reflects that your mortgage has been paid as agreed and closed with a zero balance. If you believe your mortgage servicer hasn't properly reported your mortgage account as closed, you have the right to dispute inaccuracies on your credit reports and have them corrected.
When you pay off and close a mortgage (or any other loan account), your credit scores may decline a small amount. The account and its on-time payment history will continue to benefit your credit scores for up to 10 years, but closing the loan could reduce your credit mix—a factor that has a small but meaningful impact on your credit scores. You can get a good idea of these impacts by tracking your FICO® Score☉ for free from Experian.
The Bottom Line
If you're getting close to paying off your mortgage, congratulations! As you prepare to celebrate that milestone, make a few inquiries to ensure you know what paperwork you may need to file and whom to notify so that there aren't any hiccups with your tax and insurance bills. Consider setting up free credit monitoring from Experian to make sure your mortgage status updates correctly and to track any changes in your Experian credit report.
