Let’s face it, no one actually wants a mortgage. A mortgage is simply a means to an end if you don’t have the cash. So when you finally pay it off, ridding yourself of the financial obligation is the next best thing, but could it come at the expense of your credit score? Here’s what you need to know.
Mortgage Effects on Your Credit Score
Nothing can help — or hurt — your credit scores as much a home mortgage. Home mortgage loans are reported on a monthly basis to all three credit bureaus. Put simply, a mortgage can radically increase your credit rating as you make consistent, on-time loan payments. Consider this… if you own your home free and clear or rent one, you do not receive this credit rating benefit. If you have never had a mortgage before or have not had one in recent years, a score increase of 30 to 40 points in as little as a few months is not uncommon. When you pay your mortgage off in full, the loan servicer reports the balance paid in full, ceasing the ongoing credit benefits. Paying off your mortgage in full does not directly hurt your credit score, as long as the rest of your accounts are paid as agreed in a timely fashion.
Credit Plays a Role
If you pay off your mortgage, and you have derogatory items (late payments or collections, for example) these items will continue to be reported for about the next seven years, possibly hurting the score down the road. Without the power of a mortgage payment, the other credit accounts take over as the main credit framework. If possible, pay off the mortgage when you’ve done everything else you can for maintaining a healthy credit score, so when the mortgage is ultimately paid off, your credit score is at less risk for a negative impact.
Moving from, say, a 30-year mortgage to a 25- or 20-year mortgage has no bearing on your credit score in your mission to ultimately become mortgage-free. Unlike a home equity line of credit, which acts like a giant credit card tied to your home, a traditional mortgage loan on an amortization schedule reports favorably in terms of supporting a good credit score. An equity line of credit may hurt your score when carrying a balance in excess of 30% of the total allowable credit limit.
When it comes to loan type – that is, a conventional loan, VA loan, FHA loan, USDA loan — it does not affect your credit score. All of these available loan programs report the same way to the credit reporting agencies. One exception here: If you have a loan modification in your past, your servicer is going to report “restructured mortgage” and this may hurt your credit score, as well as making you less creditworthy for new mortgages in the future. Additionally, if you’ve had a previous mortgage to your name that was short sold for a property in the past, it will report “settled less for than full balance,” which may also strain your score.
If you are prepaying your mortgage in an attempt to pay it off sooner while saving interest, you want to continue to do so, especially if you have 10 years or longer left on your mortgage term. Even if your credit needs remediation, 10 years is plenty of time to get your other credit obligations in order.
The Big Events
It’s important to know the big four events and what they can do to your credit. They are:
- Short Sale
- Deed In Lieu
Any of these events would remain on your credit report and affect your credit score in order of most recent. If you have a mortgage and the rest of your credit history is in peril, remember maintaining a mortgage with consistent payments will help support and offset bad credit factors (lates, collections, judgments, liens, charge-offs).
Finally, if you don’t need a high credit score, or the ability to procure credit for favorable terms is less attractive then becoming mortgage-free, then by all means pay the mortgage off in full if you have the ability to do so. If the rest of your credit is otherwise intact and your credit score is good, you’ll likely see little to no change to your credit once you rid yourself of your mortgage (aka the biggest liability in your life).
Keeping an eye on your credit can help you gain a better understanding of how your payment history and other factors affect you. You can get a free annual credit report from AnnualCreditReport.com and you can get your credit scores for free on Credit.com, so you can keep track of your credit standing. Check for errors that need to be corrected, and negative patterns that you can improve on so that in long run, you have a healthier credit profile.
More on Mortgages & Homebuying:
- Why You Should Check Your Credit Before Buying a Home
- How to Find & Choose a Mortgage Lender
- How to Get Pre-Approved for a Mortgage