What happens when you pay off your mortgage?

Paying off your mortgage is a big step – now it’s safe and free to own your home. It’s a time to celebrate, but also to take specific steps to make sure you are the legal owner of the property and to continue paying your home insurance and property taxes yourself.

What happens when you pay off your mortgage?

When you make the last payment on your mortgage, you can expect to hear from your lender, who will likely send you a canceled promissory note, which is the document you signed as a promise to repay your mortgage when you got it for the first time. . The canceled document indicates that you have fulfilled your obligation to repay the mortgage.

You can also receive a certificate of satisfaction stating that you don’t owe anything else on your home.

When a mortgage is fully paid off, many lenders also notify the county or city registrar that the borrower is now the sole owner of the residence. This process can take several weeks, so you should check with your lender and the local registrar’s office that the necessary documents have been filed and that the deed has been fully disclosed to you.

However, some lenders may leave this paperwork to you. In this case, you will need to contact your registrar’s office to remove the mortgage lien that the lender has placed on your home.

To avoid complications, as you near the end of your loan term, ask your lender about their practices and be prepared for any actions you may need to take on your own. While your lender can help you get your deed, they probably won’t help you with other offloading processes, such as buying property taxes and home insurance.

During the term of the mortgage, your lender collected funds from your monthly mortgage payment into an escrow account to cover your property taxes and home insurance. After you’ve made your last mortgage payment, if there’s any money left in escrow, your lender will send it back to you, but you’ll need to let your insurer know you’ll make payments in the future.

It’s also important to remove your lender from your home insurance policy, as any named policyholder may receive reimbursement for property damage or personal injury.

When it comes to property taxes, remembering when to pay them is critical, as your lender no longer makes these payments for you after you pay off your mortgage debt. Some jurisdictions levy taxes annually or semi-annually, while others do so quarterly.

What to do with the manna

Once you’ve paid off your mortgage, you’ll end up with some extra cash on hand. You can do this by paying off any high-interest debt, such as your credit card balance, or increasing your retirement savings. In 2021, you can contribute up to $ 19,500 to your 401 (k) and up to $ 6,000 to your Roth IRA. If you are 50 or older, you can also make catch-up contributions: $ 6,500 to your 401 (k) and $ 1,000 to your Roth IRA.

You may also want to consider adding more to your emergency fund. Experts recommend keeping between three and six months of cash in case of unforeseen expenses.

Whatever use you make of your freed up money, keep in mind that your credit score is likely to deteriorate once you pay off your mortgage, especially if it was your only debt. temperament you wore. In some cases, your score may improve, depending on what other types of credit you’ve borrowed and how you use it, and whether or not you have a history of late payments.

Is it a good idea to prepay?

Paying off your mortgage early can help you pay it off faster and save on interest over the life of the loan.

However, the more money you spend on paying off your mortgage, the less you will have to spend on something potentially more lucrative. While it can offer immense emotional benefit, your home is a long-term investment with a relatively low return, and there are other investments that can yield higher returns, such as certain mutual funds and paying stocks. dividends.

By delaying your mortgage repayment, you can also enjoy tax benefits for longer.

There are different strategies for prepaying your mortgage, including making mortgage payments every two weeks, adding a little more each month to your payment, or making lump sums on occasion.

If you decide to prepay, just make sure your lender allows these types of payment plans – some impose a prepayment penalty that could eat into your savings – and that the additional funds are applied to the loan principal.

Should you refinance instead?

Instead of paying off your mortgage early, you may be able to refinance the loan to take advantage of lower rates and benefit from the equity you already have in your home.

While many borrowers refinance to lower their monthly payments, pay off other debt, or pay for things like home renovations or school fees, you can also refinance to a shorter loan term in an effort to pay off your mortgage longer. quickly, reducing the total amount you owe.

To assess whether refinancing is right for you, consider:

  • How much you can lower your interest rate – usually half to three-quarters of a percentage point is good savings
  • How many years you have left on your mortgage and / or how long you plan to live in your home
  • How soon you will break even on closing costs
  • Will refinancing reduce your equity, leading to the launch of private mortgage insurance?

Some reasons for choosing not to refinance may be if your loan balance is low (in other words, you only have a few years of repayment left) or if your credit score has dropped, which would have an impact on your ability to get the lowest rate possible. .

At the end of the line

While there are new obligations to take on after you’ve paid off your mortgage, including paying for home insurance and property taxes, owning your home for free and in the clear has its advantages over homeownership. both financial and emotional. However, it doesn’t always make sense to prepay your mortgage to get there, especially if interest rates are low, so consider your priorities and the pros and cons.

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