Paying off your mortgage is a huge financial milestone and one that many people dream of achieving. But once that day finally arrives, you may find yourself wondering, “Now what?” Let’s look at how your situation will change once your home is paid off and what your next steps should be.
What Happens When You Pay Off Your Mortgage?
Before you can pay off your mortgage, you’ll need to receive a payoff quote, which is the amount you have to pay to satisfy the terms of your mortgage. Your payoff quote includes the payment amount, interest and any fees you owe.
For example, if you’re paying off the loan early, you may get hit with a prepayment penalty. You can find this information by calling your loan servicer or by logging into your home loan account. After making your final payment, your lender will reach out to confirm your loan has been paid in full.
What Documents to Expect
Your lender will mail documents showing that your mortgage has been paid in full, although the exact documents you receive can vary depending on your lender. According to Jordan Leaman, a certified financial planner and mortgage wealth advisor with Churchill Mortgage, homeowners can expect to receive a mortgage release document.
“This document signifies that the loan has been fully repaid and the lender no longer holds a claim on the property. Additionally, the homeowner should receive the original promissory note marked as ‘paid’ and a statement confirming the loan closure,” he explains.
Don’t Forget About Taxes and Insurance
In the excitement of paying off your mortgage, it’s easy to forget about homeowners insurance and property taxes. If you’re like most people, your taxes and insurance were part of your monthly mortgage payment. Your loan servicer held the funds in escrow and made the payments on your behalf.
But now that your mortgage is paid off, your lender will close your escrow account and send you the remaining balance. And you’ll be responsible for paying your insurance and taxes on your own.
How It Affects Your Credit
Most people expect that paying off debt will improve their credit score, so it can be a surprise if your score drops slightly once your mortgage falls off your credit report. That’s because removing your mortgage debt can affect factors like your credit utilization rate and your overall credit mix.
“Paying off your mortgage affects everyone’s credit a bit differently,” says Kendall Meade, a CFP at SoFi. “Especially if it is your longest-standing account, it may decrease your score a bit because your average age of credit may go down. However, I like to remind people that sometimes your overall financial picture is more important than your credit score, especially if you aren’t needing to use your credit in the near future.”
Leaman points out that paying off your mortgage also eliminates a substantial debt. “The impact on credit scores can vary, but it’s often positive, especially over time, as a homeowner demonstrates responsible debt management and creditworthiness,” he says.
[Read: Best Home Equity Loans.]
What to Do Next
Once your lender has confirmed the loan is paid in full, you’ll want to cancel any automatic mortgage payments and adjust your budget.
You also need to contact your insurance provider and local tax authority. Let them know that you’ll be paying your homeowners insurance and property taxes going forward. It’s a good idea to review your insurance policy to determine whether it still meets your needs.
And make sure you store the property deed somewhere safe. It’s a good idea to keep it in a safe deposit box at a bank in case your home is ever damaged in a fire or natural disaster.
Life After Your Mortgage Is Paid Off
Once your mortgage is paid off, it’s important to reassess your budget and financial goals. You can use the additional funds to make home improvements, start saving for a child’s college fund or invest in the stock market.
Leaman says people have many options to consider once they no longer have a mortgage payment. “They could invest the money, bolster their retirement savings, save cash for a new vehicle or celebrate by taking a fun vacation,” he says.
“Additionally, allocating extra funds towards paying off other high-interest debts or making home improvements can be strategic financial moves,” Leaman says. If you’re unsure of your next steps, he recommends consulting a financial advisor.
Meade says that she always recommends people start by focusing on paying off high-interest credit card debt, building an emergency fund and saving for retirement. “Once you have those three steps out of the way, you can focus on other goals,” she says.
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You Finally Paid Off Your Mortgage. What Now? originally appeared on usnews.com
