9 Ways to Use Your Money After the Mortgage is Paid Off

The afterlife; it’s one of mankind’s greatest mysteries.

In the world of personal finance, we “crossover” the moment our last mortgage payment is made, and for many folks, what lies on the other side is no less perplexing.

Last month I received an interesting question in my inbox from a reader named Susie who was on the verge of crossing over with her last mortgage payment.

While many of us dream of the big day when we’ll finally have our mortgage loan paid off, most of us probably haven’t put a lot of thought about what we’re going to do with the extra money we’ll have once that happens.

Anyway, that’s the boat Susie found herself in. Here’s a snippet of her letter:

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 & 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?’

Ironically, I had to address the very same “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 that we were previously using to pay off our home loan early.

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

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

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 $1000 per month into a 401(k) or Roth IRA that ekes out modest returns of just 4 percent annually will have almost $250,000 by the time she reaches age 65.

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 percent — but that’s a drawback of being risk averse.

Become a one-income family. Oftentimes, eliminating the mortgage payment will free up enough cash to allow a two-income household to get by on only one salary.

Retire earlier. In the same vein, no mortgage payments 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 approximately $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.

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 current 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 often greatly 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 awhile. 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 are currently owned free and clear. So 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.

Hopefully, 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 will always be a surefire stairway to financial heaven.

Photo Credit: Zemlinki!



Comments

  1. 1

    says

    Like you, Len, I’ll probably not be in as much of a hurry to pay off my house, as I was to pay off student loans and vehicles.

    I’ll definitely charge forward until PMI is gone, but after that I’ll have a nice chunk of extra change.

  2. 4

    says

    I’m about 5 years away and I am counting down the payments. My dream is to build up my side-business enough to quit my day job. Then, I will be the master of my own time.

    My folks bought a new house and paid it off with the rents from their old houses. Now, they are retired and own three houses free and clear.

    • 5

      Len Penzo says

      Wow. Your folks are living the sweet life, Bret. Talk about financial freedom!

      Sounds like you’ll be there in no time. As for me, I’m still not the master of my own time — or the master of my domain, for that matter. (You Seinfeld fans know what I’m talking about. LOL)

  3. 6

    says

    it all boils down to one thing, spending it whether it be today or tomorrow. the big problem with spending it tomorrow is that we don’t know who will be the ones spending it. we can only hope it will be us.

    the ideal situation is to live rich and die poor. :)

    • 7

      Len Penzo says

      Somebody once told me his goal in life is to die with the last pennies in his pocket being used to pay the mortician who buries him. I’m of the same opinion. I refuse to work for my heirs.

  4. 8

    tim says

    Great article. I have read enough of your articles to know that “currently owned free and clear” means only that a bank has no lien on the property. You know that it is only “free and clear” until local property taxes are due.

  5. 10

    says

    I know you know this, but just to clarify for others…. A taxable investment (brokerage) account is also an option.

    I don’t like all my investments to be in tax-free (IRA, 401k etc) accounts, even with the tax break, because what the government giveth, it can taketh away.

    There are a lot of rules governing any “retirement” account … Yes, you have to pay taxes when you trade, but it is at a capital gains rate, and trading should be kept at a minimum anyway.

  6. 12

    says

    The best part of getting rid of debt (including a mortgage), you have so many choices what to do with themoney. After my children moved out and we downsized we were able to max out our 401K (403B)and IRA/Roth IRA.

    • 15

      Len Penzo says

      I’d definitely group that under the splurge category. I think it’s my favorite category of them all!

  7. 16

    says

    Save, travel, retire! I am still young, so while I will start saving for retirement once I graduate, I don’t want that to take away from living. I have done way too much of that. I want to start enjoying :)

    • 17

      Len Penzo says

      It’s all about balance, Savvy Financial Latina.

      You know, for a minute there I figured the Honeybee was using a new monicker — then I got to the part where you said you were young.

      (Oh yeah; I’ll be sleeping on the couch again tonight after that crack!)

    • 19

      Len Penzo says

      That sounds wonderful. I assume you’ll be spending a little time at the place pictured in your avatar. I know I want to.

  8. 20

    says

    I “functionally” have no mortgage (no out-of-pocket costs toward my mortgage) thanks to a combination of living with roommates and renting out other sections of the house to tenants. We use the savings to renovate the house — this place has serious deferred maintenance issues — though in 1-2 years when that’s taken care of, I’d love to actually invest that money instead.

  9. 21

    says

    It is a good practice to celebrate even for small accomplishments…paying off mortgage is a big one…so it calls for a big celebration, then maybe take a short break first without thinking too much of finances or investments.

  10. 22

    says

    thats a big Sigh for me if I paid my mortgage full heheheh.. and yes it a long run to paid it off, and I’ll be thankful if I will be successful to paid it full. but I’ll invest my money if its fully paid :)

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