Author Topic: What actually happens when paying off a mortgage?  (Read 1421 times)

crocheted_stache

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What actually happens when paying off a mortgage?
« on: July 28, 2020, 05:39:37 PM »
I've made up my mind to pay off what's left of my (U.S.) mortgage, and it's within my means to do so without any peril or serious disruption to the rest of my financial plans. I know about the pluses and minuses and that's not what I'm asking about. I want that monthly payment off the list.

What I want to know, from anyone who's done it, is what are the logistics and what I should expect. Mortgage company website is useless. I will be calling them to see what more they can tell me.

If I just send them an extra large check, do I probably have to do anything about it to get them to apply the excess to the principal rather than applying it to the next month? Should I advise my bank that an especially large payment is imminent? Should I pay somehow other than by sending a check or electronic payment?

Why do I have to call them about payoff information, and why is the amount different than the remaining principal on the loan? If I pay them all but the last $500, do they send payoff information automatically?

Is there anything else to do or consider doing before paying off, or cutting loose the mortgage company?

What other follow-through do I need to do? Tell my insurance agent and my tax preparer, that I know of. Is there title stuff that happens at this stage, too? Anything else?

What should I expect this to do to my credit score, both in the short and the longer term? I pay credit cards in full and intend never to need another car loan, unless there's some benefit to it. I might someday buy a rental property with a mortgage to avoid touching other investments or open another cc for the promos. Of course, credit scores sometimes get checked in relation to insurance, employment, etc., too.

TIA for any insight or suggestions, and for links to relevant threads I might have missed when I searched.

FINate

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Re: What actually happens when paying off a mortgage?
« Reply #1 on: July 28, 2020, 06:51:54 PM »
You need to call and request a payoff quote. They will usually send you some paperwork that includes instructions for sending a check or doing a wire transfer. Keep a record of everything. And if you decide to do a wire transfer, make sure YOU call THEM to verify the wire instructions. (Scammers can, and do, spoof phone numbers.)

SwordGuy

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Re: What actually happens when paying off a mortgage?
« Reply #2 on: July 28, 2020, 07:07:12 PM »
Do you pay with a mortgage coupon book or do you pay online at their website, or via an automatic draw on your bank account?

If it's a coupon book or online at their website, there should be a place for you to specify the total payment and that the extra is for the principal.
If it's an automatic draw on your bank account, you'll need to contact your bank, as I've never allowed them to do that.

As for paying it off completely and early, contact the bank (the coupon book and website should have the correct number).  You'll need your mortgage loan number.
Ask them for a pay out letter for a given date that's a few days after you would be sending them your last payment.   They will calculate the actual amount due by that pay off date.   If you pay them by that date, the mortgage is paid in full.

Some weeks (might be 2-8) later, you'll a check for whatever your escrow balance is at the time of payoff.    You'll then be responsible for making your own property tax and home insurance payments, so don't blow it on jet skis. :)   

Depending on when your home insurance and property tax is due, that might cause you a cash flow shortage if your payoff date is right before either or both are due, but before you get the escrow refund.   


I'm assuming you're way past 20% paid off, but if you're not, when your balance gets to be 80% of the original loan amount or the current market value, ask to have PMI taken off your loan.   PMI is you paying for the bank's insurance.    You'll need to discuss this with your bank and be sure to read your loan documents beforehand as different loans may have different terms about PMI written into them.

It's a great feeling to pay off a mortgage!    Best of luck!

crocheted_stache

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Re: What actually happens when paying off a mortgage?
« Reply #3 on: July 28, 2020, 08:27:04 PM »
Thanks, SwordGuy.

I was PMI free out of the gate and have always paid property taxes and insurance directly, a la carte. They're not due that soon, anyway, and this doesn't zero me out. All good points for anyone with a different arrangement.

This outfit doesn't seem to operate with coupons, although I could get a paper statement or download one. The outstanding balance, etc. is on the mortgage company website.

I set things up a long time ago so the online bill pay at the credit union just sends the proper amount. The credit union issues the payment; the mortgage company doesn't reach in for it. I'll need to turn off that payment, but that's easy.

I'll call them and make it clear that any additional goes to principal, and find out if they need me to do anything else to indicate that. I may do a test by overpaying some one month and then do the rest in a few chunks. There's still a record of it and I already know how that means of payment works.

MilesTeg

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Re: What actually happens when paying off a mortgage?
« Reply #4 on: July 28, 2020, 10:52:58 PM »
I've made up my mind to pay off what's left of my (U.S.) mortgage, and it's within my means to do so without any peril or serious disruption to the rest of my financial plans. I know about the pluses and minuses and that's not what I'm asking about. I want that monthly payment off the list.

What I want to know, from anyone who's done it, is what are the logistics and what I should expect. Mortgage company website is useless. I will be calling them to see what more they can tell me.

If I just send them an extra large check, do I probably have to do anything about it to get them to apply the excess to the principal rather than applying it to the next month? Should I advise my bank that an especially large payment is imminent? Should I pay somehow other than by sending a check or electronic payment?

Why do I have to call them about payoff information, and why is the amount different than the remaining principal on the loan? If I pay them all but the last $500, do they send payoff information automatically?

Is there anything else to do or consider doing before paying off, or cutting loose the mortgage company?

What other follow-through do I need to do? Tell my insurance agent and my tax preparer, that I know of. Is there title stuff that happens at this stage, too? Anything else?

What should I expect this to do to my credit score, both in the short and the longer term? I pay credit cards in full and intend never to need another car loan, unless there's some benefit to it. I might someday buy a rental property with a mortgage to avoid touching other investments or open another cc for the promos. Of course, credit scores sometimes get checked in relation to insurance, employment, etc., too.

TIA for any insight or suggestions, and for links to relevant threads I might have missed when I searched.

In my experience, mortgage lenders do not automatically apply excess funds to the next payment. Mortgage lenders operate on cash flow.

In other words, if your month payment is $500, and you have to pay that every month even if you drop a lump sum payment.

Like other have said, call and request a payoff quote and/or a principal payment. The amount is different because interest is time based.

Ensure (if you haven't already), that there is not a pre-payment penality on your loan (or that you are ok with the terms of the pre-payment penality if so).

Your credit will likely go down, unless you have enough other "good" debt to keep the score good ("good debt" == non revolving debt). It will go down more the longer you don't have debt. Your credit score is about your recent track record with having and paying debt. It has nothing to do with your actual financial status or what you have done in the past (where the past is > 5-7 years).

If you aren't thinking of a complete payoff all at once, you can consider one or more "recasts". A loan recast is a "reset button" on your loan. The total amount of your loan is re-adjusted and the period of the loan is reset if you put in a minimum principal payment. So, if originally you owed 200k for 30 years, and now you have 100k and 15 years left @ 4%, you can "reset" the loan to 90k/30 years and 4% with a significantly reduced payment (allowing even more money to go to principal). Similar to a refinance, except you can't change rate. What it takes to do that (and if it's an option) varies by lender, but as an example I can do it on our loan if I have a 10% principal payment and pay a $100 fee. Extremely well worth it to cut down on interim interest payments if you have significant funds for payoff but not enough to do so in one big lump.
« Last Edit: July 28, 2020, 11:02:17 PM by MilesTeg »

secondcor521

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Re: What actually happens when paying off a mortgage?
« Reply #5 on: July 28, 2020, 11:46:44 PM »
I've made up my mind to pay off what's left of my (U.S.) mortgage, and it's within my means to do so without any peril or serious disruption to the rest of my financial plans. I know about the pluses and minuses and that's not what I'm asking about. I want that monthly payment off the list.

Congrats in advance.  I paid mine off a few years before I retired.  One advantage I predicted that turned out to be true in my case that most people don't mention:  Without the need to make a large mortgage payment, I can keep my income low.  Keeping my income low opens up the doors to lots of tax credits and deductions for low income people, such as ACA tax credits, cost sharing reductions, financial aid, and, of course, a low tax bracket.

What I want to know, from anyone who's done it, is what are the logistics and what I should expect. Mortgage company website is useless. I will be calling them to see what more they can tell me.

Yes, call them, as practices probably differ a bit from company to company and mortgage to mortgage.

What I did the last few years I had mine was just to pay large chunks against principal.  I believe there was a way for me to do this, but almost all mortgage companies will accept a check with a memo field saying "against principal" or with a short note to that effect.

When my balance got low enough, I didn't actually bother with the official payoff process.  What I did was just overpay the remaining principal by about $100.  The mortgage company received the payment, applied it to my balance, and then their computers noticed that I had a negative balance of $98.43 or whatever on my mortgage.  They considered it paid off and sent me a refund check for the $98.43 a couple of weeks later.

If I just send them an extra large check, do I probably have to do anything about it to get them to apply the excess to the principal rather than applying it to the next month? Should I advise my bank that an especially large payment is imminent? Should I pay somehow other than by sending a check or electronic payment?

Usually without instructions, the mortgage company will by default assume that you're just making your next X monthly payments, which is not what you want.  You need to specify, as mentioned above, to apply it to principal, either in the memo field of the check, in the note you include, or via their web payment system if they have one.

You don't have to notify them at all.  They're used to handling large payments and have seen it before.

You can pay however you want.  I did electronic payments because they were faster and less hassle than a check.  But then I knew they would apply the excess to principal and not to my next payment.

Why do I have to call them about payoff information, and why is the amount different than the remaining principal on the loan? If I pay them all but the last $500, do they send payoff information automatically?

Usually when they calculate the payoff amount, it's the remaining principal plus interest on the remaining principal for the next 10 or 20 or 30 days, which gives you time to get the payment to them and for them to process and apply it to your account.  I think they'll even tell you that the payoff amount is good for X days.

They do not send payoff information automatically as far as I know.  If you paid all but the last $500, they'd just expect you to make your monthly payment until the balance went to or below zero.

Is there anything else to do or consider doing before paying off, or cutting loose the mortgage company?

Before, not really.  Immediately after:

1.  Make sure your mortgage holder considers it paid off.
2.  Turn off your monthly payment push.
3.  Notify your homeowner's insurance and your property tax folks and ask them to send you the bill from now on.
4.  Make sure the mortgage lien is removed from your property title.  You can check with your local county recorder's office a month or two later to make sure it's done.  Sometimes the mortgage company wants you to pay an extra $50 or so for them to process this paperwork, although frankly they should do it just as part of the regular course of business.
5.  Review your home insurance deductible and coverage amounts and make sure you still want what you have.

What other follow-through do I need to do? Tell my insurance agent and my tax preparer, that I know of. Is there title stuff that happens at this stage, too? Anything else?

See the list above.  You don't really need to tell your tax preparer.  You'll get one last mortgage interest statement, and it probably wont be deductible unless you have other Schedule A items; of course give that to your tax preparer next year, but s/he will just copy that number over into their tax program; there is nothing special about a payoff tax-wise.

What should I expect this to do to my credit score, both in the short and the longer term? I pay credit cards in full and intend never to need another car loan, unless there's some benefit to it. I might someday buy a rental property with a mortgage to avoid touching other investments or open another cc for the promos. Of course, credit scores sometimes get checked in relation to insurance, employment, etc., too.

TIA for any insight or suggestions, and for links to relevant threads I might have missed when I searched.

Your mortgage will stay on your credit report for several more years after your last payment - seven or ten IIRC.  It should of course update to a zero balance and showed as paid off.  I don't know what paying off a mortage does to your credit score for sure, but I would expect it to go up, because you have shown responsibility in paying it off, and at the same income you have more capacity to pay any credit card or other debts, so you should be a better credit risk.

I just checked and my credit report via Credit Karma still shows three mortgages, the last payments of which were in 2011, 2012, and 2014.  So I think it is 10 years after the last payment.  (I didn't actually have three mortgages; this was the result of refinancing my mortgage several times as rates dropped in that time frame enough to make it worth it.)

I paid off my mortgage about six years ago, have been FIREd for four, and my Credit Karma scores are 836/831.

Fishindude

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Re: What actually happens when paying off a mortgage?
« Reply #6 on: July 29, 2020, 11:42:03 AM »
You need to call and request a payoff quote. They will usually send you some paperwork that includes instructions for sending a check or doing a wire transfer. Keep a record of everything. And if you decide to do a wire transfer, make sure YOU call THEM to verify the wire instructions. (Scammers can, and do, spoof phone numbers.)

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Sibley

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Re: What actually happens when paying off a mortgage?
« Reply #7 on: July 29, 2020, 12:03:35 PM »
What dark age is everyone's banks operating in? The paper statements I get you can write in what the different amounts are - total x, minimum payment, extra principle, etc. Same with doing a payment from the website. Just specify that it's extra principle.

The website might also have a payoff quote request button. If not, you'll need to call them and request that.

You'll also need to make sure that the lien is released against your property legally, and home insurance needs to take off the lender's name, they'll probably need proof.

(yes, the banking system is in the dark ages, but at least in terms of extra principle, I haven't had an issue yet)

Mini-Mer

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Re: What actually happens when paying off a mortgage?
« Reply #8 on: July 31, 2020, 05:30:42 PM »
I looked up the payoff process on my mortgage holder's website, was directed to call in, got a recorded message directing me to send a fax and then wait to receive a fax... and then I did exactly what secondcor521 did, figured out the numbers myself and paid the same way I always paid.  That worked fine.

If you do go the official route, independently verify wire transfer information before using it.  A couple people have already said this, but it bears repeating.  Thieves have inserted incorrect wire transfer instructions into transactions by both phone and e-mail, so best practice is to call the company to confirm before sending money.

Congratulations!

 

crocheted_stache

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Re: What actually happens when paying off a mortgage?
« Reply #9 on: August 07, 2020, 05:13:09 PM »
I did call for a payoff statement. Among the reasons I want on of this mortgage is the general uselessness of the mortgage holder now it's been bought/sold/merged/restructured an annoying number of times. They answered my questions, after some pushing. Thanks to you all, I was asking the right kinds of things.

After a couple of smaller test payments to make sure things were pointed at the right places, I tried a bigger one. Checking account bill pay at local credit union has a $30k monthly limit. I can transfer more than that but apparently not send a payment. Now I have to decide whether to work around it or get official and attempt the wire thing. There's no need, no hard deadline or escrow requirement, or anything like that, so I think I'll try other more familiar stuff first.

AccidentialMustache

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Re: What actually happens when paying off a mortgage?
« Reply #10 on: August 07, 2020, 10:13:23 PM »
I want to say when I walked into the bank (my local bank kept loan servicing on the last "rates dropped >1% again??? How is that possible?" refinance) to pay off the last house's mortgage, I asked for the payoff amount, they told me, and I wrote them a five-working-on-six figure personal check. We had a stock sale windfall and decided to kill the mortgage with it. There was the county recorder's fee on top of the payoff amount. I'm not sure when we did that... 2016? That's the right range.

Note if you're operating similar on a HELOC, there's a difference between paying it to zero balance and paying it off. The latter involves the recorder's fee and closes the HELOC. The former means you quit paying them monthly, but still have the credit available to use again if you want.