The day your mortgage loan is paid off is an exciting time but you still likely have a few questions. Typically when mortgage borrowers have paid off their loans, they want to know about their escrow accounts and any balances in them. In mortgage lending, lenders use escrow accounts for borrowers’ regular payments for property taxes and insurance. Once your mortgage loan is paid off, your lender examines your escrow account balance and then takes action to return any leftover money to you.
Basics of Escrow Accounts
Escrow refers to a third-party service that is part of the process for every home purchase, except cash purchases. When a buyer and seller initially arrive at a purchase agreement, they select a neutral third party to act as the escrow agent. The escrow agent collects a deposit from the buyer that is equal to a small percentage of the sale price. This deposit is known as “earnest money”. In exchange, the seller takes the property listing off the market. Until the final exchange is completed, both the seller’s property and the buyer’s deposit are said to be “in escrow”.
While a mortgage holder (most typically a bank) collects the principal and interest payments each month, they also can collect extra to pay the homeowner’s insurance payments and property taxes. They do this because when you borrow money from a lender to finance your home purchase, the property becomes the collateral for your loan. Your lender wants to ensure that the property is adequately insured so that it can be repaired or replaced if damaged. Likewise, they want to prevent a tax lien being placed on the property if you neglect to pay taxes. In most cases, this makes it easier on the homeowner as the money is collected in smaller increments each month rather than being due all at once each year (in the case of property taxes).
Leftover Money in Escrow
When the final mortgage payment is made, there is generally some money left over in the escrow account. The lender should provide you with an escrow statement. Be sure to check this statement over to make sure the information matches your own records. If you find an error or have a question, let your lender know before a refund check is issued.
Escrow Refund Period
Mortgage lenders can take up to 30 days to refund escrow account balances to borrowers whose mortgage loans have been paid off. For several reasons, mortgage lenders tend to take their time refunding their borrowers’ escrow accounts. For one, when your mortgage loan is paid off your lender wants to ensure it’s really fully paid off before refunding escrow account balances. It also takes time for mortgage payoff funds to clear the banking system, adding to escrow account refund delays.
Using Refunded Money
The question of what to do with your mortgage escrow account refund depends on whether you have another mortgage. You might have sold your home, for instance, paid off your old mortgage loan and obtained another loan for your new home. Consider using any escrow refunds from your paid-off mortgage loan to apply to the principal balance of your new mortgage loan. Refunded mortgage escrow account funds offer a good opportunity for investment or practically any other purpose, though.
Property Taxes and Insurance Premiums
Now that your mortgage is paid off, make arrangements with your local property tax collector to have these bills sent directly to you. The same holds true with your homeowner’s insurance company. You will still have to pay property taxes every quarter or annually, depending on state and local law. Your insurance company may bill you monthly, semiannually or annually, depending on their procedures and your preference.
Handle these matters as soon as possible. In a worst-case scenario, failure to pay property taxes can end up with a house going to auction at a sheriff’s sale. At the least, neglecting to pay property taxes promptly means financial penalties and a drop in your credit score. If you don’t notify the insurance company that you are now the dwelling’s sole owner, filing a claim may become a confusing and delayed process.
Strategies for Paying off Your Mortgage Quickly
Most homeowners make all of their payments according to the mortgage schedule. But there are other ways that you can accelerate the payoff of your mortgage ahead of schedule.
- Bi-Weekly Payments: Bi-weekly payments allow you to pay half your mortgage payment every two weeks instead of once a month. This also makes it so you pay one extra payment each year, which shaves off about four years from the standard 30-year mortgage.
- Lump Sum Payments: In addition to making the normal monthly payment, some homeowners pay extra when they can using such things as tax refunds, annual bonuses, inheritances and other unexpected windfalls.
- Rounding Up Payments: By rounding up your mortgage payment to the next $100 (or more), you will be paying extra towards the principal of your mortgage every month. Most homeowners do not even miss the additional payment out of their monthly budget.
- Mortgage Payoff Fund: Instead of paying extra towards your mortgage, you can set up an investment account dedicated to your mortgage. You will add extra money to this account to earn stock market returns – provided those returns exceed your mortgage interest rate. At some point in the future, you can cash out this account and pay off your mortgage if you’d like.
How It Affects Your Credit
Your credit score is unlikely to change much after paying off your mortgage. Your payment history and amount owed have already been factored into your credit score for years.
However, if you are paying off a large lump sum, the effect on your credit may be more noticeable. Your amounts owed, as shown on your credit report, will suddenly be much lower, and that metric is a big component of your credit score, accounting for about 30% of it. In that case, you might see a nice bump. But if you already have excellent credit, the effect may be negligible.