A first or second mortgage must be discharged when paid off through a home refinance, a sale or the receipt of cash equaling the full balance outstanding. Although the specific process can differ from state to state, the basics are fairly standard. Discharging a mortgage is similar to the recording process -- with a reverse outcome -- used when a new mortgage is recorded or after a sale/purchase, refinance or any new real-estate-secured loan. You can also discharge a mortgage through a Chapter 7 bankruptcy.
Discharging a Mortgage
When a mortgage -- whether it's the first, second or third -- is paid off, it must be discharged by you, your now former lender or your representative, usually a lawyer. Just as an attorney or escrow company recorded a new deed and mortgage when you bought your property, a discharge must be recorded at the city or town hall or wherever legal real estate records are filed, like a Registry of Deeds. The physical discharge document, identifying the property and signed by the lender, must be presented -- usually with notarized signatures -- to the recording personnel.
Discharge Document Requirements
A discharge must include the name of the lender, or other holder of the mortgage, the amount of the mortgage being discharged, the date of the original mortgage, the name of the person who "executed" the mortgage (you) and the address of the property upon which the mortgage was placed and recorded. There must also be a statement of the date the discharging party signed the document and the notary public who witnessed the lender's signature, and it must include a notary seal.
Discharging Mortgages Through Chapter 7 Bankruptcy
Most people filing a Chapter 7 bankruptcy petition choose to protect their homes by not including their mortgage as a debt to be discharged; sometimes there are circumstances that make this a wise decision. While all you need to do in order to discharge your mortgage loan is to include it in your list of debts to be erased, if you do, you must understand that you will lose your home and generate a more serious negative mark on your credit report. Consider this action carefully. Including your mortgage in bankruptcy permits your lender to sell or auction your home to the highest bidder to recover its secured debt.
Recording a Discharge
While real estate law is fairly consistent throughout the United States, there can be some logistical or procedural differences from state to state. If time is not an issue, after receiving your payoff, your lender will prepare and send a discharge to your local office that keeps real estate records. Should you get a new mortgage through a refinance, the closing agent -- lawyer or escrow company -- will usually discharge the old mortgage and record the new one.