What happens when you pay off your mortgage

Your credit score gives lenders an easy way to determine if you’re likely to repay a loan, so keeping your credit score high is important. 

Paying off your mortgage is an exciting moment, meaning you own your home free and clear of any debt, but it can cause a slight drop in your credit score by impacting your credit utilization and mix.

We’ll break down how paying off a home loan can affect your credit and what you can do to keep your credit score high.

A quick refresher on credit scores

Your credit score is a numerical score that usually ranges from 300 to 850. The higher your score, the more creditworthy you seem to lenders, which means you have an easier time qualifying for loans and securing low rates.

Your credit is influenced by factors like your payment history, debt-to-income ratio, and the age of your credit history.

Lenders view mortgages as a long-term investment, so a good credit score is important when you apply for one. They’re relatively unique in the world of loans due to their long terms and the collateral securing them. So, paying off debt like a mortgage can influence your credit score.

What happens to my credit score when I pay off my mortgage?

Paying off your mortgage is a good thing, but when you make that final payment, you may see a small dip in your credit score. This is caused by the way credit scores are calculated.

Some of the factors that influence your credit score are your credit mix, meaning the different types of loans you have, the average age of your loan accounts, and your credit utilization.

Paying off your mortgage means getting rid of a very old account on your credit history. It also eliminates a mortgage from your credit mix, so you have fewer types of loans open. These can both cause a slight drop in your credit.

The good news is that a paid off mortgage still appears up on your credit score for up to ten years after you finish paying it off, so lenders can still see the positive information related to your mortgage payments.

Ways to manage your credit score after paying off a mortgage

Keeping your credit score high is important if you want to qualify for other loans and keep the costs of those loans low.

If you’re concerned about a drop in your score after paying off your mortgage, consider these tips.

Keep other credit accounts in good standing

The most important factor in determining your credit score is your payment history. Even one late or missed payment can have a big impact on your score, dropping it by a double-digit number of points.

The best way to keep your credit strong is to maintain a long-term history of on-time payments. If you keep your other accounts, such as auto loans or credit card accounts, in good standing, you’ll be able to keep a high credit score.

Avoid opening new lines of credit too soon

Applying for a new line of credit or loan has a double whammy of a negative effect on your credit.

For one, each hard pull on your credit, which happens when a lender checks your credit report after you apply for a loan, drops your score by a few points.

Second, adding a new account to your credit report reduces the average age of your credit accounts. If you don’t have a lot of older accounts to keep this metric high, it could cause a notable drop in your score.

If you’re concerned about keeping your credit score high, avoid applying for new loans or credit cards unless they are necessary.

Monitor your credit regularly

As the saying goes, an ounce of prevention is worth a pound of cure. This holds true when it comes to your credit.

Monitoring your credit report, both to identify mistakes or errors as well as unauthorized or fraudulent accounts, is very important. The sooner you identify a mistake or potential identity theft, the sooner you can act to rectify it.

There are many ways to monitor your credit. Some banks and credit card issuers will let you get regular updates on your report so you can see if anything changes. By law, you’re also entitled to one free copy of your credit report from each credit bureau per year.

The Rocket Money app also includes a feature for tracking your credit score. You can keep an eye on your score and how it changes over time, as well as get alerts when anything on your report updates.

FAQ

Paying off your mortgage should be an exciting time in your life, so make sure you take some steps to limit potential impacts on your credit to avoid potential headaches down the road.

Will closing my mortgage hurt my chances of getting another loan?

In general, closing your mortgage won’t hurt your chances of getting another loan. In fact, it may help. 

While your credit score may take a small hit, you’ll have one fewer debt to deal with. Lenders will see that you are able to dedicate more money to paying off a new loan. Keep in mind the credit score you need to buy a house is usually around 620 for a conventional loan.

Should I avoid paying off my mortgage to protect my credit?

No, you shouldn’t avoid paying off your mortgage to protect your credit. Paying off your mortgage is a good thing to do, and the impact on your credit is typically small. Plus, it’s not worth paying hundreds or thousands of dollars in interest each month just to boost your credit score.

How long does it take for my credit score to recover?

Paying off your mortgage will likely cause only a small dip in your credit score. You can expect it to recover over the course of just a few months.

The bottom line: Your credit score will recover after paying your mortgage

Paying your mortgage off is a good thing, so it may be surprising that it could cause your credit score to drop. Usually the drop is small, and your credit will recover quickly. Then you’ll be able to enjoy greater financial freedom without a mortgage payment to deal with.

If you’re thinking about paying off your mortgage, use the payoff calculator from Rocket Mortgage^® to learn more.