Everything You Need to Do When You Pay Off Your Mortgage
About to make that final payment on your mortgage? Here's what to expect.
If you own your home, there’s a very good chance that you have a mortgage—close to 80% of all homeowners in the U.S. have a mortgage of some sort. While a mortgage is considered “good debt” in that it’s a relatively low-interest loan that builds wealth and assets, and financial professionals sometimes argue that you should keep your mortgage active as long as possible in order to free up money for investment (and other considerations), the simple fact is if you’re getting close to paying off your mortgage you should prepare to celebrate. Whether it was for five or 30 years, it’s an achievement to clear such a big debt—and own your home outright.
In addition to planning a classic mortgage burning party, however, you need to make a bunch of other, less-fun plans: Paying off your mortgage triggers a landslide of paperwork and changes to your life that you need to be ready for. Here’s what you need to know if you’re coming up on your final mortgage payment.
Ensure documentation
The most immediate thing you need to do to prepare for a mortgage-free existence is to make sure you know what documents you’ll need, and then make sure you get those documents. This is the modern world, after all, and if there isn’t a record of something filed away then it didn’t actually happen. When you contacted your lender about a mortgage payoff statement, they should have detailed for you the documents they’ll be supplying to close out the mortgage. If they didn’t, follow up; not all lenders supply the same documents, so you’ll need to know what you should be expecting. There may be fees associated with some of these documents, but those are probably incorporated into the final payoff amount. If not, you’ll need to know that, too, so you can take care of them.
Generally, you should get the following documents when you pay off the mortgage:
Promissory note. You signed this when you took out the mortgage—it’s essentially a legal document where you promise to pay back a loan or debt. The lender should return this to you marked “canceled” in some fashion as acknowledgment that you no longer owe them money.
A deed of reconveyance. Your lender should generate this document to show that you have satisfied the debt and the title to your property has been transferred wholly to you. In some cases where a third party is involved in a mortgage, there will be a deed of trust as well.
Satisfaction of mortgage document. This will be filed with your local government entities so official records of ownership and title can be updated, but you should receive a copy of it as well for your own records—just in case the government screws up.
Final mortgage statement. It might seem superfluous in lieu of all the other paperwork you’re receiving, but make sure you get a final statement showing the loan paid off in full. When it comes to owing enormous financial institutions huge sums of money, you simply can never have too much documentation.
Finally, check your credit reports about one to two months after you pay off the mortgage to make sure they show the debt as closed, and check for an escrow refund from your lender—there’s often a small amount of money left over in the escrow account that is legally yours.
Prepare for changes
Once you have all your documents and the world has been alerted to this momentous change in your financial life, get ready. For more change. Because paying off a mortgage can have a lot of impact on your life beyond no longer cutting those big checks:
Credit impact. Credit scores can seem irrational, and this may be one of those times. You might see a bump because your debt ratio is lower, or you might see a drop because you have a lower mix of credit types.
Mortgage interest tax deduction. One of the bigger impacts of paying off a mortgage is the loss of this federal tax deduction, which lets you deduct your mortgage interest from your taxable income. Consult with a tax professional to get a picture of what that will mean for next year’s tax bill.
Cancel autopayments. Did you set up autopay for your mortgage to ensure you never forgot a payment? Better cancel it, unless you want to find out how hard it is to get a multi-thousand dollar refund from a big bank.
Reroute tax and insurance statements. Your lender was most likely managing your property taxes and insurance payments through the escrow account. If that’s the case, you’ll need to contact the insurance company and the local tax office and get everything sent to you instead. This means you also have to start paying those bills, so make a savings plan to ensure you have the funds to cover them.