Most mortgages last anywhere between 20 and 30 years. People grudgingly make these monthly payments year after year, never imagining that someday they will be free from the debt. Here’s what happens when you finally pay off your mortgage.
What happens when you pay off your mortgage? Beyond the party you throw for yourself and the dreams that can get checked off your list, here's what to expect.
Paid in Full
After you make your final mortgage payment, your account will have a new look to it. When you log in to your online account or open the envelope of your paper bill, you will see the words “paid in full”. In other words, you no longer owe them any money!
You’ve probably been paying a mortgage for close to two or three decades. It’s just become a part of your life and an expected expense. For as long as you can remember you have budgeted for your mortgage payment, and now that’s changing.
Update Your Tax and Insurance Bills
It’s likely that your taxes and insurance have been escrowed by your mortgage company and that they have been paying those bills for you for as long as you have had your mortgage. You will want to make sure to notify your insurance company and set up payment. You’ll also want to actually pay the tax bills you get each quarter, rather than ignoring them.
It’s important to take care of both these things soon after paying off your mortgage. If you do not set up a new payment for your insurance, your policy may lapse and you are at risk should something happen to your home. If you ignore your tax bills, you may end up paying late fees and fines.
What To Do With That "Extra" Money...
Now that you have no mortgage payment, you may notice that you’ve got some excess money in your monthly budget. The question is, what should you do with it? A good financial planner would encourage you to capture that money and reallocate to a new investment. There are many options for doing this.
You can funnel that mortgage payment amount into a high yield savings account. The interest you will earn will be low, but it is a safe way to invest, pretty low risk, and will keep your money safe. There are many banks offering this type of account, both online and brick and mortar. Do some internet searching to find the one that works best for you.
Another relatively low-risk option is investing in a retirement account. Your best bet is to consult with a financial adviser to determine what type of account fits your situation. These accounts are easy to set up and you can deposit the money automatically, which is a great way to recapture the money from your mortgage payment.
If you are more risk tolerant, you can play around with investing in stocks. In recent years, many new online stock trading apps have come on the scene. These are targeted at the amateur investor who has a little bit of money they want to move into the stock market. Given recent market shifts, this is a riskier way to save money.
Regardless of how you decide to save money, what’s important is that you make use of that money you now have available.
Use Your Home’s Equity
Although it may seem crazy, one way to make the most of your debt-free home is to leverage it to buy another one! Now that you owe $0 on your mortgage, and own the home free and clear, you have 100% equity. This means that you can borrow money against your home to use for other things.
Real estate investing is a smart way to use your money to make more money. Although it sounds complex, there are some straightforward and simple ways to invest. Since you’ve already been a homeowner, you’ve already got the knowledge and skills it takes to manage buying a home.
Depending on your motivation, investing in real estate can mean buying a vacation home, a multi-family home, or even a small apartment building! The choice is yours and is constrained only by your budget and imagination.
Funding a Real Estate Investment
There are three primary ways to use your paid off mortgage to invest in real estate. These are:
- Traditional mortgage (like the one you just paid off)
- Home equity line of credit (HELOC)
- Home equity loan
These options differ in how much you can borrow, how much of a down payment is needed, and what your interest rate will be.
Now that you are free of your original mortgage, your credit is probably decent, and you likely qualify for another mortgage. You can use this option to take a loan to purchase an investment property. The challenge with this is that mortgages on investment properties typically require a 20% down payment.
A traditional mortgage is probably what you are most familiar with since you’ve been paying one for many years. If you don’t like to stray from your comfort zone, this may be the best option for you, but may also require some saving so that you can get that 20% down payment.
Home Equity Line of Credit
Just like a credit card, a home equity line of credit (HELOC) lets you spend money that isn’t really yours and then pay it back with interest. The amount of money you can get in your credit limit is related to the equity that you have in your home. Since your mortgage is paid off, that equal to the value of your home.
As with any line of credit, or credit card, a HELOC allows you to spend money when you need it, but then you must pay it back with interest. The interest rate will depend on your credit score and the current market rates but is likely much lower than a traditional credit card.
Home Equity Loan
This is similar to a traditional mortgage, but you use the value of your home as equity toward the loan. Since your primary home is paid off, you have 100% equity. The exact dollar amount will depend on the valuation of your home. If your home is appraised at $300,000, you have $300,000 worth of equity to use toward a new investment.
Regardless of how you decide to reallocate the money you are saving on mortgage payments, you should take a moment to acknowledge this achievement. Do something special, buy yourself a gift or take a vacation. You only live once!