What Lenders Don’t Tell You: How Paying Off Your Mortgage Affects Your Credit

Imagine you've been waiting to pay off your mortgage for years, slowly chipping away with each monthly payment and you finally accomplish the mammoth feat of being debt-free. Although this should be a time for celebration, the high you get from paying off your loan could disappear quickly once you realize that your credit score dropped after ridding yourself of mortgage debt completely. While lenders are responsible for telling you the terms and conditions of your home loan, they may not have told you the impact of having a zero balance next to your mortgage loan or other negative remarks on your credit score.

Here are things lenders may not have told you about paying off your mortgage:

Missing Just One Mortgage Payment May Significantly Lower Your Score
Although lenders are usually forgiving about missed payments on certain credit obligations, they tend to be more strict when it comes to mortgages. Just one late payment, usually 30 days or more after the due date, could result in a double or even triple digit drop on your credit score. Late payments also put you at risk for foreclosure, which is even worse for your credit score. 

Paying Off Mortgages Completely Could Hurt Your Score
As with installment loans, mortgages can both help and hurt your credit score. Installment loans, such as mortgages and student loans, are debt designed to be paid off in a certain period with a fixed number of payments. When it comes to evaluating credit quality, lenders will put mortgage loans above the rest – even higher than credit cards and regular installment loans. Since real estate loans are among the hardest types of credit lines to be approved for, your credit score could see a significant bump from having a mortgage. However, the opposite is also true about the hit your credit report could take if you manage to pay off your debt.

Why Your Credit Score Drops After Paying Off a Home Loan
Paying off your mortgage completely could hurt your credit if you do not have any other installment loans on your report. Since your credit score is calculated by the different types of credit on your report, the lack of an installment loan, such as a mortgage, could result in a drop in your score. Typically, lenders would like to see a combination of both revolving credit and installment loans. The reason for this is your ability to juggle credit cards along with a mortgage or car loan shows that you are good about managing your finances and handling different types of credit obligations. Without a good mix of credit on your report, which may be the case if you no longer have a mortgage, you may see your score lowered.

How to Reduce the Impact of Paying Off Your Mortgage
As long as other areas of your credit report – payment history, credit card utilization rate, etc. – are still positive, you will not see too much of an impact on your score once you have freed yourself of your home loan debt. In paying off your mortgage, you should have a lengthy history of on-time payments, which should help raise your credit score after a setback like a slight drop in a credit score. To make sure your credit lines are in good standing, you should ensure that there are no missed payments being reported on your history and that you manage to keep balances on credit cards and other loans low. 

If you find yourself with late payments on your mortgage or other loans, contact credit report agencies and the mortgage lending company to dispute this claim.