How paying off your mortgage affects your credit score
If you're able to pay off the mortgage on your home, you'll almost certainly plan a celebration. Some traditional ceremonies include burning a copy of the mortgage documentation and painting the front door red. Or you might forgo these and simply throw a party for family and friends.
You'll still need to prepare for certain home expenses when you own the property free and clear, such as property taxes, insurance, and repairs. You'll also want to anticipate how paying off the mortgage might affect your credit score.
It seems like clearing a sizable debt off your record would result in a corresponding boost to your credit score. But paying off the mortgage will likely have a minimal effect on this score, and in some circumstances may even result in a slight dip in your rating.
Regular, on-time mortgage payments can be highly beneficial for your credit score, since they show that you can effectively manage your debt. The credit bureau Equifax says taking out a mortgage will also help your score by establishing a better mix of open lines of credit.
Paying off a mortgage is most likely to have a beneficial effect on your credit score if you still have other open debts, such as a car loan. Terri Williams, writing for Realtor.com, says knocking out one loan will improve your debt-to-income ratio and free up more cash each month to address any other debts.
Conversely, your score might drop if the mortgage is the only debt you are currently paying. Eliminating mortgage payments may remove the only installment debt in your credit report, resulting in a less diverse mix of debt for credit bureaus to assess. It will also affect the length of your credit history, which accounts for about 15 percent of your credit score.
However, any hit your credit score takes is likely to be minor. Alicia Bodine, writing for the budgeting site The Nest, says about two-thirds of your credit score is derived from your payment history as well as how your debt compares to your credit limits. Equifax says a history of on-time payments will likely offset any negative impact on your credit score.
Moreover, your record of mortgage payments has a long-lasting effect on your credit score. Bodine says this payment history can influence your credit score for as long as 10 years after you post your last payment.
A drop in your credit score after your last mortgage payment may be due to other, unrelated factors. For example, racking up several expensive purchases on your credit cards may briefly drive down your score.
Many homeowners pay off their mortgage with the proceeds from selling the home, but keep a home loan on their record because they purchase a new home. However, some people may pay off their mortgage this way and then rent their next residence. Experian says this situation is unlikely to affect your credit score, since you'll still have a good credit history if you made your payments on time.
Rent payments are less likely to positively influence your credit score since they are made directly to a landlord. However, some property management companies operate in such a way that timely rent payments can be reported to credit bureaus.
When paying off a mortgage, you'll need to decide if it makes sense to submit the final payment early. Contributing more toward the principal over the life of the loan will help winnow down the amount of interest you owe to the lender and allow you to complete the mortgage before its scheduled end date.
You'll want to make sure that completing the loan early won't have unintended consequences, though. Deanna Templeton, writing for MarketWatch, says lenders may have prepayment penalties that will make early completion of the loan less palatable. Keeping a mortgage open for its full length can avoid these fees and help demonstrate that you can responsibly manage a debt over a long period of time.
Avoid contributing extra to the mortgage or paying it off early if you aren't able to comfortably manage other expenses at the same time. Williams says you should have enough money saved up to address unexpected home repairs and other emergencies.
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