You decide to use half of your windfall to payoff the real estate loan that you acquired previously. As you might expect that payoff shrinks money supply.

When you payoff the real estate loan, you reduce the amount of money in your Cash in Bank account (an asset and a source) and reduce your Real Estate Loan (a liability and a use). The entries look like this:

You

1. decrease (credit) your Cash-in-Bank account, and
2. decrease (debit) your net Real Estate Loan account.

To reflect that same transaction, the bank credits its Real Estate Loans account (retiring that asset provides the source of funds). At the same time they debit their Deposits account (the use of the funds from the loan payoff.) The reduction in the bank's deposits amounts of a shrinkage in the quantity of money in the banking system.

Your Bank

1. decreases (credits) it's Deposits liabilities for your account by $250,000, and
2. decreases (debit) it's Real Estate Loans account (an asset) by $250,000.

When Your Bank made this real estate loan to You, You and Your Bank created $250,000 of money that had not existed before that moment. Now, when you pay off this loan you and your bank have destroyed $250,000 of money. The Federal Reserve did not get involved in either transaction.