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.
This post comes from Len Penzo at partner blog Len Penzo dot Com.
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:
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.
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.
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.
I like all these recommendations. Pick any one. Just do it quickly before your property taxes increase by as much as your old mortgage.
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!
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.
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.
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.......
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