Paying off your home loan is a momentous accomplishment that can free up a significant amount of cash each month. Think carefully about how to spend it and make sure you don’t neglect expenses that you’ll still have to cover once your house is paid off.
Direct Extra Funds to Other Goals
Your mortgage was most likely your largest debt, but it probably wasn’t the only one. If you still have an auto loan or credit card bills, you’ll be able to put more money toward those debts each month and pay them off at a faster pace.
You should have enough money in an emergency fund to cover essential living expenses for at least a few months. Now that you don’t have to worry about monthly mortgage payments anymore, you’ll have an opportunity to beef up your emergency fund.
If you haven’t saved as much as you’d like for retirement, paying off your home loan will give you an opportunity to put more money into a 401(k) or an IRA. If your retirement is several years or decades away, pumping additional funds into an investment account can make a significant difference in your total balance, thanks to compounded interest.
If you have one or more children who will attend college in the future, you may want to put more money toward a college savings plan after you’ve finished paying off your mortgage. Just make sure that you don’t neglect your own retirement savings goals. Your kids will be able to work and take out loans, if necessary, to finance their higher education, but you’ll have to support yourself in retirement.
Perhaps you’ve been putting off home improvements because of concerns about the cost. You may feel more comfortable taking on an expensive project now that you don’t have to worry about making mortgage payments anymore.
Maybe you’ve been wanting to take a long and expensive vacation, buy a new car or purchase a vacation house, but you didn’t feel comfortable doing so while you were still working to pay off your home loan. Now that you’ve accomplished that, you can put extra funds into those other goals.
Remember That You’ll Still Have to Pay for Taxes and Insurance
Many homeowners make one monthly payment that covers their mortgage principal and interest, plus property taxes and homeowners insurance. If you had that type of arrangement, you’ll still be responsible for paying your property taxes and homeowners insurance premiums after you pay off your mortgage.
That means the amount of extra money that you’ll have available won’t be the total that you were paying each month; it will only be the portion that went toward your home loan. Keep that in mind when thinking about how to adjust your budget after you pay off your mortgage so you don’t plan to spend money that isn’t actually available.
