What Happens When a Mortgage Loan Matures?

Paying a loan off before it matures breaks the contract.

When you take out a mortgage, you promise to pay your lender a certain amount of money every month for a set period of time. After this period of time expires, and you've made your payments as promised, the loan matures. Depending on the type of loan you have, you'll either own the property or you'll have to make one last payment.

How Amortization Affects Your Loan

Your lender splits your monthly mortgage payment into principal and interest portions. How much is applied to each depends on the type of loan and how long you've had it. With an interest-only mortgage you pay no principal during the loan term; when the loan matures, you are responsible for paying the balance. If you can't pay the entire balance in cash, you can refinance to a new loan. A fully-amortized loan applies payments to both principal and interest; when this loan matures, you probably won't owe anything.

How Amortization Affects Risk

During the housing bubble, many borrowers opted for the interest-only loan because payments on these loans are typically lower. The borrowers bet that when the loan matures -- often after a short period of time, such as five years -- they would be able to refinance to a new loan with the equity that appreciated during the course of the interest-only term. When the housing market crashed, these borrowers were unable to refinance because their equity didn't appreciate as anticipated. Since these loans often rolled into a new, much higher payment, borrowers found that they could neither sell nor make the new, higher payment.

Maturity and Interest Rates

As risky as interest-only loans seem in hindsight, they do have significant advantages. For example, loans with very short maturities tend to have much lower interest rates -- and payments. Loans with longer maturities that fully amortize -- such as that mortgage workhorse, the 30-year fixed -- cost more to assume. Homeowners who have accumulated significant equity in their homes may refinance out of a 30-year fixed to a 15-year fixed product; the loan maturity is shortened, the interest rate is lower and equity accumulates faster.

When Your Loan Is Paid in Full

If you have paid your loan in full, your mortgage lender has no further claim to your property. Each state has its own preference on the type of document that secures the loan, and this determines how the property title passes to you. Make sure you follow up with your county records office to verify that your home has no encumbrances, such as liens. If the records aren't accurate and you attempt to sell your home, the sale won't go through until the title search comes back clear.

References

• Financial Web: What Does Loan Maturity Mean?;