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.
Term-Shortening
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.
Loan Type
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.