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As soon as you take out a mortgage, you probably can't wait until the day when you pay it off. But when that day finally comes, what do you do?
Don't kick your feet up just yet. Once you pay off your mortgage, there are a few steps you have to take to complete the process of establishing that you now fully own the home outright. While the rules can vary a bit based on your state and lender, the process is similar.
Receive the Documents
Once your mortgage is paid off, you'll receive a number of documents from your lender that show your loan has been paid in full and that the bank no longer has a lien on your house. These papers are often called a mortgage release or mortgage satisfaction.
You'll likely receive:
- A statement indicating that the loan's balance has been paid in full
- A canceled promissory note (when you took out the mortgage, you signed one)
In many cases, your lender will file a certificate of satisfaction with your county government, which releases the home's deed to you and indicates that you are now the sole owner. Ask your lender if they will do this for you. If they will, be aware that it can take a few weeks or months for it to be filed. Once your lender has told you they've filed the documents, contact your local records office to confirm that their records show your mortgage has been cancelled.
If your lender says they don't file it for you, you can file it yourself—just check with your local county clerk or registrar to find out what the process entails.
Update Your Insurance and Taxes
Here's the bad news: Your property taxes and homeowners insurance don't go away once you pay off your mortgage. If you have money in escrow that your lender used to pay your property taxes and homeowners insurance for you, it's possible that you'll have extra money leftover in your escrow account. If there is any extra, the lender should refund you by mailing a check. If you're not sure, ask your lender if you'll be getting a refund.
Once your mortgage is paid off, you no longer have a lender requiring you to have homeowners insurance. While you aren't federally required to have it, it's important to keep your coverage since it protects you financially if your home incurs major damage or if someone is injured on your property. If your homeowners insurance was paid by your lender via escrow, once your mortgage is canceled, contact your home insurance provider to inform them that you paid off the mortgage. Let them know that you are now the sole owner of the property and will now be handling the bill yourself. Also, make sure your premiums are set up to deduct from your bank account, not your lender's.
Property taxes, on the other hand, aren't optional, and you now have to remember to pay them. Check with your state, county and local taxing authorities to have your property tax invoice sent to you. Find out their billing frequency, since some charge annually and some charge quarterly, and make sure to start budgeting for this expense.
Allocate the Extra Funds
Once you no longer have a mortgage payment, a big chunk of your monthly income is now freed up for other goals and expenses. To make sure you don't fritter it away, put careful thought into what you'll do with the extra money. Here are some ideas:
- Pay off your other debt. Whether you have credit card debt, an auto loan, student loans or other obligations, consider paying off your debt with your new disposable income. By shortening your debt repayment timeline, you'll lower the amount of interest you pay over the life of the loan. Just make sure any other loans you have don't have a prepayment penalty.
- Put it in an 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.
- Maximize retirement savings. If your retirement account balance isn't where it needs to be, now is the perfect time to start using some of your former mortgage money to beef up that 401(k) or IRA. The sooner you start saving for retirement, the better due to compounding interest.
- Work toward other savings goals. What are your other financial dreams? Buying an investment property or vacation home? Going on a dream trip? Start setting aside some of this income toward your goal. Consider creating a separate savings account specifically for it to avoid any temptation to spend that money on something else.
- Start investing. While you can use this new cash cushion to invest in retirement, you can also put some of it toward other types of investments for shorter-term goals. Consider opening a brokerage account and buying stocks, bonds or mutual funds depending on your risk tolerance. Investing in the stock market can bring much higher returns than the low interest rates typical of checking and savings accounts, but it carries higher risk. If you're getting close to retirement, you could also invest in CDs, which are safer than investing in the stock market since the returns are somewhat low, but guaranteed.
Monitor Your Credit
Once all of the paperwork associated with your mortgage repayment is completed and filed, check your credit report to ensure it accurately reflects that your mortgage has been satisfied.
Having a mortgage in good standing can help your credit since on-time loan repayments over a long period looks great to lenders and creditors. Paying it off can have an impact on your credit score, though it's usually minor. If it was the only installment loan on your credit report, your mortgage dropping off could cause a slight decrease in your credit score since you'll no longer have a source of regular positive loan repayment or a mix of different credit types. If the rest of your accounts are in good standing, the change should be negligible, but it's smart to keep an eye on your credit just to make sure there are no big changes.
Get Prepared Now
Don't wait until you make your last payment to learn what you need to do when your mortgage is paid off. If your final mortgage payment is coming up soon, now is the time to start figuring out how your lender handles your documents, how to pay your taxes, and how you'll put that money to work once you no longer have a mortgage bill.