Paying off your mortgage is a significant milestone: you now own your home outright.

So, what comes next?

While it’s a moment to celebrate, it’s also important to take specific steps to ensure everything is in order. This includes obtaining proof of your full legal ownership of the property and making sure homeowners insurance and property taxes remain paid.

Let’s explore what happens after you pay off your mortgage and what you should do moving forward.

What happens when you pay off your mortgage?

When you make your final mortgage payment, there are several important steps to prepare for. Here’s what to expect:

  • Receive Documents from Your Lender: Your lender or loan servicer will likely send you paperwork confirming your final payment and formally releasing you from your mortgage obligation (see “Documents to Expect,” below).
  • Update Your Homeowners Insurance: You’ll need to remove your mortgage company from your policy, specifically by eliminating the mortgagee clause that ensures reimbursement if the home is damaged or destroyed.
  • Arrange for Property Tax Payments: Since your lender will no longer be paying property taxes from your escrow account, ensure you or your accountant receive notifications from your local government about amounts and due dates.
  • Notify Your Accountant for Tax Season: Remember that you won’t have mortgage interest to deduct on your tax return moving forward.
  • Monitor Your Credit: Keep an eye on your credit score, as it may drop slightly after the mortgage loan is removed from your credit history. You may also want to update your financial information on your credit card accounts to reflect the absence of this monthly obligation, which could help increase your credit limit.

Let’s dive into each of these items in more detail.

Documents to expect after paying off your mortgage

When you pay off your mortgage, your lender will provide paperwork confirming that your home loan is fully paid. It’s essential to gather all necessary documents, and in some cases, any remaining escrow funds, before considering your mortgage settled.

Here are the key documents you should collect:

  • Canceled Promissory Note: This document, signed at closing, shows your promise to repay the mortgage. The canceled note from your lender confirms you’ve fulfilled that obligation.
  • Loan Payoff Letter: This letter details the exact amount needed to pay off your mortgage, including any interest or fees. It also verifies that you’ve settled your account.
  • Deed of Reconveyance: This document serves as a lien release, indicating that your mortgage company no longer has a legal claim on your property.
  • Escrow Funds: If there are remaining funds in your escrow account after paying off your mortgage, your lender should issue you a check or direct deposit for those funds.
  • Property Deed: This document confirms that you are the sole owner of the property.
  • Certificate of Satisfaction: Issued by your local recorder or county clerk, this document verifies that you’ve paid off the loan on your property.

Updating your taxes and insurance

After your mortgage is fully paid off, your escrow account will be closed, and any remaining funds will be returned to you. By law, your mortgage servicer must issue your escrow refund within 20 days of closing the account. Going forward, you will need to manage your homeowners insurance premiums and property taxes independently.

While homeowners insurance is no longer mandatory once your mortgage is settled, maintaining coverage is highly recommended. If you intend to keep your current insurance policy and provider, contact your insurer to remove your mortgage company from the policy. This ensures you receive any reimbursement for claims filed directly. If your insurance premiums were previously included in your mortgage payments, arrange for your insurer to bill you directly.

It’s also crucial to familiarize yourself with your local property taxes and their due dates, as your lender will no longer handle these payments from your escrow account. Notify the local tax authorities to send property tax bills directly to you instead of your mortgage servicer. Depending on your location, you may receive a single annual property tax bill from your city, town, or county, or multiple bills from various entities such as school districts, fire departments, and utility districts. Your town or city hall clerk’s office can provide guidance on identifying all relevant taxing authorities. Ensure you or your accountant receive notifications from your state or municipality regarding payment schedules.

How to allocate your extra funds after paying off your mortgage

You can use the money saved by paying off your mortgage early in several ways, including:

  • Paying off other debts
  • Increasing contributions to your retirement accounts
  • Building your emergency savings
  • Stashing extra cash in a high-yield savings account or certificate of deposit (CD)
  • Saving for a child’s college education
  • Making home improvements (see FAQ on accessing home equity below)

How does paying off your mortgage affect your credit score?

Paying off your mortgage in full typically doesn’t have a major effect on your credit score. However, once the mortgage is removed from your credit history, your score might drop slightly due to a decreased credit mix, meaning you’ll have less variety in your types of debt.

How to pay off your mortgage faster

Some borrowers choose to pay off their mortgage early, also known as “prepaying,” in order to save on interest and increase their monthly cash flow. However, this may not always be the optimal decision, even if you have the financial means.

If you’re considering paying off your mortgage early, you typically have two primary options:

  1. Prepaying the principal: This involves making additional payments towards the principal balance of your loan. This reduces the total interest paid over the life of the loan and accelerates the rate at which your mortgage balance decreases. You can do this through lump-sum payments, smaller biweekly payments that add up to an extra payment per year, or by increasing your monthly payments with the extra amount applied directly to the principal.
  2. Refinancing: Instead of prepaying, you can refinance your mortgage by replacing your existing loan with a new one. Refinancing can help you pay off your mortgage faster if you opt for a shorter loan term, such as switching from a 30-year mortgage to a 15-year mortgage. This approach typically increases your monthly payments, unless you also secure a lower interest rate on the new loan.

It’s important to consider that paying off your mortgage early may not always be the wisest financial move. According to McBride, “Prepaying your mortgage is a relatively low financial priority, especially if you have a very low interest rate, like below 4 or 5 percent. There are many other uses for your money, such as paying off higher interest debt like credit cards or personal loans, boosting your retirement savings through a 401(k) or IRA, building up emergency savings, or investing for other financial goals like children’s education or through a brokerage account.”

Additionally, keep in mind that paying off your mortgage early doesn’t relieve you of other homeownership expenses, such as property taxes, home repairs and maintenance, and homeowners insurance (though not required, highly recommended).