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Mortgage paid off -- now what?

Once you've reached that financial sweet spot, here are 9 ways to put the extra money you'll have to good use.

By MSN Money Partner Mar 16, 2012 10:36AM

This post comes from Len Penzo at partner blog Len Penzo dot Com.


Len Penzo dot Com on MSN MoneyThe afterlife is one of mankind's greatest mysteries.


House with coins (© Digital Vision/Getty Images)In the world of personal finance, we "cross over" the moment our last mortgage payment is made, and for many folks, what lies on the other side is also perplexing.


While many of us dream of the big day when we'll finally have our mortgage paid off, most of us probably haven't put a lot of thought into what we're going to do with the extra money we'll have once that happens. That's the boat a reader named Susie found herself in. Here's a snippet of her letter to me last month:

Do you have any thoughts on what you would do once you've paid off your mortgage? My husband and I will be fortunate enough to face this question at the end of the year and we are kind of scratching our heads as to what's next. We max out our 401ks and we will probably start saving more for college for our two sons, ages 6 and 8. I know we are very lucky to be in this situation, but I'm really having a hard time trying to answer the question "now what?"

I had to address a similar "now what?" question several years ago after I reversed course and came to the conclusion that it no longer made financial sense for me to pay off the mortgage early. That decision suddenly freed up an extra $500 per month in additional principal payments we had been making to pay off our home loan early.


If you sit down and think about it, plenty of options are available to people who have paid off the mortgage on their principal residence and are looking for ways to use the additional cash.


Assuming you have no other debt to pay down, here are just a few ideas. Keep in mind that not all of them are designed to maximize your return on investment. (Post continues below.)

Invest it. Of course, for many folks who find themselves with an abrupt infusion of monthly cash after making their final mortgage payment, the first option that often comes to mind for the extra money is to invest it. It's a tempting option. A 50-year-old homeowner who invests, say, an additional $1,000 per month in a 401k or Roth IRA that ekes out modest returns of 4% annually will have almost $250,000 by the time she reaches age 65. (Are you saving enough for retirement?)


Increase your savings. Yes, I realize interest rates are downright pitiful at the moment -- even the highest-rate certificates of deposit are barely returning 1% -- but that's a drawback of being risk-averse.


Become a one-income family. Eliminating the mortgage payment often frees up enough cash to allow a two-income household to get by on only one salary.


Retire earlier. In the same vein, no mortgage payment means you'll need less money in retirement. The additional cash you save can be used to help you retire sooner than you might have otherwise.


Pay for the kids' college education. With public four-year college costs now averaging about $21,000 per year -- and private universities averaging twice that -- you could defray a portion of your kids' educational expenses. Folks with younger kids, like Susie, could consider contributing to a 529 college savings plan. (How much should you be saving for college?)


Start up your own business. If you're feeling adventurous, you can take the money you're no longer giving to the bank and use it to test your entrepreneurial skills.


Remodel your home. If your primary residence is feeling its age, you may want to consider putting some of that money back into your home. Bathroom and kitchen remodels, when done smartly, can increase the value of your home, thereby providing additional income when it's time to sell.


Buy a second home. You can use your freed-up income to buy a vacation home or maybe even a rental property that you could use as a second stream of income.


Splurge. There's nothing wrong with splurging once in a while. If you've paid off the mortgage, why not celebrate? You deserve it. After all, retiring the mortgage is a tremendous accomplishment, especially when you consider that only one in three homes is owned free and clear. As long as you've built up an emergency fund, are saving for retirement and have eliminated all of your credit card debt first, there is no reason to feel guilty.


I hope I've helped dispel some of the mysteries regarding life after the mortgage. But even if I haven't, you can rest assured that a paid-off mortgage is a surefire stairway to financial heaven.


More on Len Penzo dot Com and MSN Money:

Apr 3, 2012 1:14AM
When my wife and I got our first mortgage we crunched the numbers between a 15 yr and 30 yr to see the amount of money that would be spent. It was clear the 15 yr was the better way. Then we asked ourselves the question. Why does it have to be 15 yrs? Why can't we do it in 5 yrs? Who decided that it can only be a 15 or 30 year mortgage? And that is were it started. A few bumps in the road along the way, but 7 years later and our mortgage was paid off. We could hardly believe it. Our friends and family couldn't either. Then the doors of opportunity opened. I up and quit my job. We started a business doing exactly what I was doing before, but this time taking the whole pie home instead of the tiny slice I was getting before (We paid the business off in a year and a half). 8 months ago we bought a 2nd home specifically for a rental (Its been great, Income every month that easily pays mortgage with extra to put back on the mortgage). We are about to buy our 3rd home in the next three months because our family is getting bigger and we want more space. We will then have 2 rentals and a business all generating income. I smile from ear to ear as I think about the poor farm life I come from and the even poorer family I married into. The government paid for all of my education (pel grants, etc). I am 35 years old with a 5 and 7 year old and one on the way. I project I will be retired in about 10 years. My advice to all. Don't get succored into that 30 year mortgage. Crunch the numbers. Its not that hard to figure out (I didn't even finish collage), Don't get succored into all those little things that suck your money away. (All my friends got married, bought big houses, Brand new trucks and cars, big vacations, living the big life took out home equity loans on there big homes that they could not afford. They have now lost it all. Everything. They are 33,34,35,36 years old and renting, unemployed or bankrupt. We were all dealt the same cards. Do something useful with the money when you have it. Mortgage free equals financial freedom and endless opportunities.
Apr 2, 2012 9:47PM
I never felt so free as when I paid off my mortgage. Nobody could take it now.(as long as I paid the property taxes!) It's also nice to have that money freed up to do other things. What used to be emergencies becomes an inconvenience. Really helps with the retirement savings.
Apr 3, 2012 12:02PM

I like the idea of paying off the mortgage early and disagree with those who say it is a mistake.  (Banks will tell you that because they usually loose money on loans paid early). 


A paid house is an asset -FREE and CLEAR (except for taxes of course).  No worries of loosing my house to the bank in bad financial times.  Also, the interest you save is a sure thing, unlike most other investments.  The tax deductions don't add up to much either and chances are deductions will become less and less as government gets more and more greedy.  


My preference is to own instead of loan.  It feels better to me.  I'm no Advisor.   

Apr 2, 2012 9:41PM
Congratulate yourself for being fiscally astute.  Continue saving.  Relax and enjoy the fruits of your sacrifice.
Apr 3, 2012 2:41PM
party and tell the bank to kiss my @ss
Apr 3, 2012 3:11AM

I  sold my house in Detroit and moved out of that state back in 2003. I took out an 8 year mortgage in the new state.  It will be paid off in less than 2 months.

All of that "I'll do it later" will be done now. So long as my health holds out.


Apr 3, 2012 5:21PM
Paid the home off 3 yr ago. Totally debt free. The wife and I have cut our work load back. Basically work for insurance. Took a cruise to the west indies to celebrate a milestone. Life is good. Get debt free as soon as possible. Life is just beginning.
Apr 3, 2012 12:40PM
We paid ours off twenty years ago.  Used the extra money to pay for our children's college and now in the past year paid for a condo at the beach!!!  Making the decision (and sacrifice) to pay it off as fast as possible was the best financial decision my wife and I ever made!!!
Apr 3, 2012 2:52PM

I paid off our house yesterday!  We had a 30-year mortgage but refinanced to a 15 year mortgage and paid it off in 10 years.

My husband's folks were still paying on their house when they retired.  They borrowed money from their eldest son and daughter-in-law to be able to go do things. 

My parents had everything paid off before retiring.  I saw how financially secure they were and wanted the same thing.

I know that I do not want to be worrying where the money will be coming from for the monthly mortgage payment when we retire.  This peace of mind is worth any real or imagined loss of money by paying the house off early.



Apr 3, 2012 3:23PM
We paid off our 30 yr mortgage in 15 yrs, remolded then decided to retire and move closer to family.  It was a tense 3 mos after the move, until our previous home got sold.  We took the profit from the sale and paid off our current home.  We both got part time jobs but if we got laid off today, we would be ok because we save our current paychecks and live off of our pensions.  Wanting to go to work and having to go to work to keep a roof over your head is totally different.  I  thought my husband was crazy to pay off our home early but now I am so happy we did this.  Do it, very much worth the small sacrifice.
Apr 3, 2012 6:39AM
"Buy a second home. "

Now that's a real intelligent choice. Just got out from under a $700-$1200 a month mortgage and I'm going to rush out and burden myself in my 50s or 60s with ANOTHER $1200 a month payment for 15 or 30 years. Really smart move there.
Apr 3, 2012 3:38PM
Paid off my 30 year mortgage @ 19 years in 1999. Because it was payroll deduction direct deposit I continue to let the money go into the account until I retired in 2009. Walked away with a substantial savings statement.
Apr 2, 2012 10:06PM

I like all these recommendations. Pick any one. Just do it quickly before your property taxes increase by as much as your old mortgage.

Apr 3, 2012 3:40PM

You would do well to put a significant portion of the mortgage payment into a contingency fund for repairs, maintenance, and upgrades to the place.


Although not everyone's experience, many folks get the mortgage paid off and within a year or four find it's time for a new roof, or siding, or  . . . you get the idea. Living in a house you've bought and paid for has its advantages over a rented house or condo, or an apartment. I wouldn't have it any other way.


But they don't call them "money pits" for nothing!

Apr 3, 2012 11:55AM
We paid our house off in late 2008 when the financial crisis was crashing.  Glad we did, we started picking up our agriculture land purchases.  Glad we land  has about doubled and cash rents are 35% higher.   Stopped dropping money into a losing 401K plan just enough to get the match.    I would never max. out a 401k plan, lousy  returns unless you are in your 20' or 30's you might have a million dollars when your 65. But, what   is a million dollars 20 years from now.   It's only $50,000/yr. for 20 yrs.   Alternative investments are the answer-   when has your INVESTMENT advisor ever suggested anything else but cd's, stocks, or mutual funds. (Look at Oil & Gas leasing partnerships, Equipment leasing, Ag-REITS, or Farmland)   These have been winners for more than 10 yrs.,  Stocks are losers the past 10 yrs and will be the next 10 yrs.    We will look like Japan.   They have had no growth the last 25 yrs., US the last 10 yrs or so.  Congrads on paying off your house.  No one will ever say you are stupid for doing that.  Also always go for 15 yr mortgages,   Never 30, people say "Oh, I'll just pay more every month to make it a 15 yr mortgage,  but you know nobody ever does it.  Keep saving but look to alternative investments.   Forget what these MSN articles say.
Apr 2, 2012 11:03PM

I am surprised the writer did not mention that property taxes will need to be paid directly by the homeowner now and one shouldn't forget to keep up homeowners insurance. 

Apr 3, 2012 4:32AM
How about saving for the next car you will need in 4 or 5 years? A new car is like $30k for some better than a grocery getter.  At that you'll need to save over $600 a month for 4 years so that you can just purchase outright.
How about saving some money for that nice vacation you'll want to take?  A trip to Hawaii will cost you thousands, better plan for that.
Hey if the kids have moved out, how about renting a room?  Use the money for home improvements.
Buying real estate to have as a second home is a very poor investment unless it can be rented out too.  Besides, becoming a landlord requires time and talent to manage.

Apr 3, 2012 12:48PM
getdebtfree, if you have the means to give to charity then do so.  Most people are trying to make plans to survive old age.  We get your point.
Apr 3, 2012 9:26AM

The writer of this article is stupid.....    I can promise you this, these people will know more about what really should be done with this extra money.   Keep living like you are and invest this extra money.  Don't run out and buy, buy or buy....    invest, invest and reinvest.......


Apr 3, 2012 9:46AM
I'm in heaven? Health care costs will ruin us all.
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