The answer might surprise you.
Carrying a mortgage is something you might easily end up doing for 30 years. Even if you manage to pay off your home early, chances are, you'll have carried that loan for many years before being done with it. A paid-off mortgage is a milestone worth celebrating. But in some cases, paying off a mortgage could actually cause a minor hit to your credit score.
Why paying off a mortgage could hurt your credit score
You'd think that paying off a loan would reflect positively on your credit score, since it shows you're no longer borrowing as much. But in some cases, a small hit to your credit score might ensue when your home gets paid off.
That said, the hit in question should be minor in nature. Your credit score might dip around 10 points or so once your mortgage is paid off, but we're not talking about a massive hit, like the type you'd face if you were to be late with a few mortgage payments.
So why would paying off your home cause your credit score to drop at all? It boils down to the way credit scores are calculated.
There are five factors that go into calculating a credit score:
- Your payment history, which speaks to how timely you are in paying bills
- Your credit utilization ratio, which measures how much of your available revolving credit you're using at once
- The length of your credit history, which shows how long you've had different accounts open
- Your new credit accounts, which shows how many loans and credit cards you've applied for recently
- Your credit mix, which shows what types of loans you have
Of these factors, your payment history and credit utilization ratio carry the most weight. Paying off a mortgage could impact the length of your credit history as well as your credit mix.
If you don't have any long-standing accounts in your name other than your home loan and you pay off your mortgage, which you may have held for decades, that could result in a shorter credit history -- and a little bit of credit score damage. Similarly, if paying off your mortgage leaves you with just credit card accounts in your name, that could reflect poorly on your credit mix (since mortgages are a healthy type of debt to have and credit cards aren't). As such, your score could take a minor hit.
Should you avoid paying off your mortgage early due to credit score concerns?
You may decide not to pay off your home loan early because you have an affordable interest rate on that mortgage and you want to free up your money for other purposes. But if you're able to pay off your home ahead of schedule and think that's the right choice for you, don't let concerns about your credit score stop you.
As mentioned above, any hit to your credit score resulting from a mortgage payoff should be minor. If paying off your mortgage helps you improve your financial situation, it's a move worth making.
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FAQs
Will Paying Off Your Mortgage Affect Your Credit Score? No, paying off your mortgage early won't have a significant effect on your credit scores.
Does paying off my mortgage affect my credit score? ›
For example, paying off your only installment loan, such as an auto loan or mortgage, could negatively impact your credit scores by decreasing the diversity of your credit mix. Creditors like to see that you can responsibly manage different types of debt.
Why did my credit score drop after paying off my mortgage? ›
It could lower the average age of your accounts
If you paid off a car loan, mortgage or other loan and closed it out, that could reduce your age of accounts in VantageScore's calculations. That's also true if you paid off a credit card account and closed it.
What happens when I pay my mortgage off? ›
Once a mortgage has been cleared the homeowner can either: Continue to live in the property and enjoy their reduced outgoings. Sell up and make use of the money made from the sale. Remortgage the property with a residential mortgage to access money without having to sell and move elsewhere.
Is it a good idea to pay off your mortgage? ›
You might want to pay off your mortgage early if …
You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.
Will my credit score go down after mortgage? ›
For most homeowners, taking out a mortgage means signing up for the largest sum of debt in their lives. Credit reporting agencies will penalize this new mortgage debt with a short-term ding in your credit score, followed by a significant boost after several months of regular, on-time payments.
How to get 800 credit score? ›
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
How long does a paid off mortgage stay on your credit report? ›
This could be because the credit reporting time limit has passed or the credit bureau's internal reporting time limit for that type of account has expired. Typically, though, a mortgage will remain on your report for up to 10 years after you pay it off.
How to get 850 credit score? ›
According to FICO, about 98% of "FICO High Achievers" have zero missed payments. And for the small 2% who do, the missed payment happened, on average, approximately four years ago. So while missing a credit card payment can be easy to do, staying on top of your payments is the only way you will one day reach 850.
At what age should you pay off your mortgage? ›
To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
When you have paid off your mortgage in full: Your escrow account will be closed. Any funds remaining in the account will be returned to you. The mortgage servicer is obligated by law to send you your escrow refund, if any, within 20 days after it closes your account.
Are there disadvantages to paying off a mortgage early? ›
A: If you put extra resources toward a home loan, you'll no longer have access to that cash flow and that's one of the disadvantages of paying off a mortgage. That means it's important to establish an emergency fund first — generally three to six months of living expenses — for unexpected financial needs.
When a mortgage is paid off, what happens to deeds? ›
A reconveyance deed is a document that transfers the title of a property from the bank or mortgage company to the borrower once they've fully paid off the debt.
Is it good to be mortgage free? ›
What are the benefits of being mortgage free? Having more disposable income, and no interest to pay, are just some of the great benefits to being mortgage free. When you pay off your mortgage, you'll have much more money to put into savings, spend on yourself and access when you need it.
Is paying off mortgage better than saving? ›
Paying off any debt that accumulates interest is always a sensible option as, more often than not, the interest cost of a debt will be higher than the interest earned on savings.
What happens if I pay $1000 extra a month on my mortgage? ›
Throwing in an extra $500 or $1,000 every month won't necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you're paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
How long does it take for a paid-off mortgage to show on your credit report? ›
But if you already have excellent credit, the effect may be negligible. You also should check your credit report after 30 to 60 days to make sure it shows your mortgage was paid off.
Does paying off a loan early affect your credit score? ›
In most cases, you can pay off a personal loan early. Your credit score might drop, but it will typically be minor and temporary. Paying off an installment loan entirely can affect your credit score because of factors like your total debt, credit mix and payment history.
Does your mortgage payment go down as you pay it off? ›
Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. This means that over time, more of your monthly payment goes to paying down the principal.
