You’ve Paid Off Your Mortgage: What Happens Next?

If you’ve recently paid off your mortgage, it’s time to celebrate. That means you’ve likely made monthly payments over multiple decades and had to make significant financial sacrifices along the way. But just because you’ve reached the finish line on financing doesn’t mean all your homeownership tasks are done.

Take time to better understand what you should expect after you pay off your mortgage, if any paperwork is needed, how it can impact your credit, to-dos related to escrow accounts, property taxes, and homeowners insurance, and what to do with that extra money you’ll pocket.

How long a mortgage payoff usually takes

Most borrowers choose a mortgage loan amortized over 30 years. But Americans only keep their loan on average for about 12 years, according to SoFi, although many of these folks refinance to a new loan by that time as opposed to paying off their 30-year mortgages entirely after 12 years. Others choose a shorter term, such as a 15-year loan.

Data from the U.S. Census Bureau’s 2023 American Housing Survey indicates the median mortgage term at origination is about 30 years, although the actual payoff time differs widely depending on prepayments or refinancing. Interestingly, 63% of people who have paid off their mortgage are retired versus 28% of homeowners below retirement age.

“There is no universal stat on the average mortgage payoff time because it depends on individual strategies, but 20 to 30 years is a realistic range for most,” says Steven Glick, director of mortgage sales for HomeAbroad.

What to expect after your mortgage is paid

Okay, you’ve made your last mortgage payment and the house is fully owned by you. Now what?

“First, expect to receive a letter from your lender, referred to as the ‘mortgage satisfaction letter.’ This proves you no longer owe them anything on your house and your loan is paid in full,” says Jeffrey Zhou, CEO and founder of Fig Loans.

This document is typically issued by your mortgage servicer, the company you’ve been sending payments to, within 30 to 60 days of your final payment, depending on your state’s laws. It usually arrives by snail mail, but some lenders will deliver it electronically.

“This letter is critical to keep. Store in a safe or with your important papers, because it’s proof that you own your home outright. If you sell your property or refinance in the future, this document can prevent headaches with title companies,” suggests Glick.

Your lender will also file a release of lien with your local county recorder’s office. This officially confirms that you own the home free and clear. It’s a smart idea to check your local records to confirm that this has occurred.

You may also receive a canceled promissory note or a final loan statement showing a zero balance. Whatever arrives, carefully keep and store these documents, particularly if you expect to sell your home down the road.

Insurance, taxes, and escrow account matters

You may be off the hook when it comes to mortgage payments, but you still are responsible for paying homeowners insurance premiums and property taxes. These are two items that can slip through the cracks if you’re not careful, especially if you had an escrow account tied to your loan that handled these payments on your behalf.

“Once your mortgage loan is done, escrow accounts usually close. That means you’ll need to budget separately for property taxes and insurance moving forward. Be sure to meet the payment deadlines,” advises Ryan Zomorodi, co-founder of Real Estate Skills.

After your mortgage is repaid, you can avoid missed bill payments by creating and managing your own escrow account via a dedicated bank savings account. That’s where you can park the necessary funds for things like property taxes, insurance, and related costs that need to be paid directly. Consider setting up automatic transfers from your checking account or other funding source to this separate bank account. Carefully track the due dates for these bills and create bill payment reminders.

Keep in mind that, although your lender required you to have homeowners insurance, this is no longer a requirement once the loan is paid off. However, it is strongly recommended to have homeowners coverage in place at all times.

“You need it to protect you against fire, theft, disasters, and lawsuits,” Glick continues. Without it, you could face financial ruin in the event of damage or litigation.

Heads up that paying your local tax authority and insurance provider directly may lead to sticker shock. Consider that when you had an escrow account, your lender collected smaller monthly sums to cover these large bills; in other words, you didn’t have to pay the full cost all at once. Now that your lender escrow payments are over, expect to make larger payments fewer times during the year – such as once every 12 months for homeowners insurance and perhaps twice a year for property taxes.

Effect on your credit

Paying off your loan could have a minor, temporary effect on your credit score, often by 10 to 20 points for a few months, although it’s nothing to worry about.

“Because mortgages are installment loans, closing this loan could slightly lower your score by reducing your credit mix or average account age,” explains Zomorodi. “However, if you have consistently made on-time payments, a positive history will remain on your credit report for up to 10 years.”

Remember that the freedom of owning your home 100% will outweigh any minor dip in your credit.

“I often tell my clients that a paid-off mortgage will not tank your credit, but don’t be shocked by a little wiggle. Keeping other credit accounts, like credit cards, in good standing helps.Focus on making timely payments elsewhere, and you’ll be fine,” continues Glick.

Other to-dos

There are a few related tasks and separate errands you may need to tick off your list following mortgage completion.

“First, check your county recorder’s office (online or in person) to ensure that the lien release was filed properly. Mistakes can happen, and you want a clear title,” says Glick. “If it has not been filed, contact your lender to get it sorted out. It’s also a good idea to request a copy of the recorded lien release that you keep for your records.”

Next, if you were paying mortgage insurance due to making a low down payment on your house, this should automatically be removed after your loan is paid off. But it’s wise to double-check with your lender to make sure no further charges are made.

Also, update your homeowner’s insurance policy so that you are listed as the sole owner, with the lender’s name removed.

Additionally, carefully review your will or estate plan to reflect that your property is now debt-free, particularly if you plan to bequeath it to heirs/beneficiaries.

What to do with those extra dollars

No longer having to make mortgage payments can add a lot of flexibility to your budget. But instead of spending those extra dollars frivolously, it’s a good idea to put that money to work for you in constructive ways. Here’s what the pros recommend:

• Set aside extra dollars for your emergency fund. Aim to cover six to 12 months of expenses, including insurance, taxes, and maintenance/repairs.
• Max out your retirement accounts. Learn what your contribution limits are for IRA or 401(k) accounts, and start salting away extra dollars there. Ideally, this strategy can allow you to retire earlier and more comfortably.
• Diversify those dollars. “If you are debt-free, consider investing in a diversified portfolio for wealth growth. Historically, broad-market investments have averaged about 7% annual returns after inflation, outpacing today’s 6.8% mortgage rates,” Glick points out.
• Invest in home upgrades. Make energy-efficient improvements and remodels that generate a higher return on investment at resale.
• Ponder purchasing an investment property. Owning a rental unit you landlord or hiring a property management firm to handle these duties can add extra revenue streams. Alternatively, flip one or more fixer-uppers.

The bottom line

Pop that champagne bottle and burn a photocopy of your mortgage statement in the fireplace: You’ve made it and you’re mortgage-free. But remember to check that all the major and minor details are handled, including the release of your lien, receipt of your mortgage satisfaction letter, and punctual payments of your property taxes and homeowners insurance.

This can be a great occasion to also carefully inventory your finances, review budgets, and do some updated estate planning to ensure your short- and long-term goals are met.