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 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 don’t put a lot of thought into what we’re going to do with the extra money — and 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 and we’re kind of scratching our heads as to what’s next. We max out our 401(k)s and we’ll probably start saving more for college for our two sons, ages 6 and 8. I know we’re very lucky to be in this situation but I’m really having a hard time trying to answer the question: ‘now what?’
Ironically, I faced the very same “now what?” question way back in 2010 when I reversed course after coming to the conclusion that it no longer made financial sense for me to pay off the mortgage early. That decision freed up $500 per month we were spending on additional principal payments.
The good news is there are plenty of options available.
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% 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% — 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 $25,000 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. Kitchen and bathroom 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!
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.
I’m with ya on paying things down as fast as you can to get rid of the PMI.
I’m also not paying down my mortgage and instead invest the funds into our rental properties. These are all great ideas for what to do with that extra money!
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.
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)
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. 🙂
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.
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.
Absolutely, tim.
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.
Good point, Dr. Dean. That’s why I appreciate the comments. Sometimes I overlook things!
Travel, save and retire early…I would definitely would want my extra cash to be spent in that order.
I’d definitely group that under the splurge category. I think it’s my favorite category of them all!
While it is true that we will never outright own our homes because of property tax, 200 dollars a month tax and insurance is much better than 817 a month with my mortgage payment in there. I almost have enough money to pay off my mortgage in full now and I have no other debts but I will have to build up an emergency fund immediately after payoff. After I do that, I can put my mortgage payment into retirement savings.
Paying off the mortgage definitely makes maxing out those accounts much easier, doesn’t it, KC?
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 🙂
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!)
Can’t wait until my mortgage is gone. Going to use it on retirement and funding vacations hopefully.
That sounds wonderful. I assume you’ll be spending a little time at the place pictured in your avatar. I know I want to.
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.
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.
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 🙂
Liquor retailing is a business that has a steady demand throughout the year. If your store is in a good location, you will have a constant stream of customers. You are sure to do brisk business if you stock a wide range of products and build a reputation in the area where you operate.
Um, okay …
I would make more investments in my community through additional charitable giving.
+1 for putting it towards a rental property. Use a property manager to avoid the landlord headaches, and let someone else pay your mortgage for you.
Rinse, repeat.
Then enter retirement with some paid off rental properties generating a steady cash flow that matches the actual inflation rate, not the government-fiddled one they base your dwindling Social Security payments on.
Thanks for sharing, Len. This was very helpful for me.
I really enjoyed reading this post!
Once I pay off my mortgage, I am going to invest my monthly mortgage payment in the hopes of retiring earlier and having a nicer, more luxurious lifestyle. Of course, another option down the road may be for me to invest this “saved” money into another rental real estate property to generate passive income, but I’ll weigh these options as I approach paying off my mortgage.
Thanks for sharing!
Cheers,
Fiona
Thanks, Fiona!