Congratulations on owning your home outright! A mortgage paid in full means no worries about monthly mortgage payments or the threat of foreclosure. You'll still have housing expenses, and you need to keep up with all of your paperwork. Now you'll also have extra money to invest and can look forward to putting more money away.
Keep the Paperwork
Once your mortgage has been paid off don't literally “burn” your mortgage. Continue to retain a document file. Keep your title insurance policy in case you need it when you sell your home. The HUD settlement statement, also known as the closing statement, you signed when you first bought your home is important for tax purposes, so hang on to that, too. The original settlement statement helps establish your cost basis for future capital gains taxes, and you shouldn't rely completely on your attorney or other parties for keeping a copy that is easily accessible.
Check on the Discharge
Check to make sure that the lender filed the proper paperwork to discharge your mortgage. Many county land records can easily be searched online, or you can research the title in person or through a title attorney or title examiner. Sometimes filing the discharge slips through the cracks, and you'll need it on the books if you ever go to sell or to take out another loan. Some lenders don't even file for you but instead mail the discharge papers and expect you to file them yourself. You can usually file by mail, but follow up to make sure everything was property recorded.
Keep Up with Home Expenses
Being free of mortgage payments is still far from being free of housing expenses. If your homeowners insurance and property tax payments had previously been escrowed along with your mortgage, they were out of sight and out of mind. Now you need to make sure that you make those payments directly and on time. They can usually be made online. Be aware that most municipalities impose stiff interest charges and other fees if taxes are paid late. Insurers usually give a small discount for paying off the policy in full each year, so now that you don't have regular mortgage payments you should take advantage of that discount.
Consider Taking Out Another Mortgage
Taking out another mortgage is probably the furthest thing from your mind. There is one school of thought, however, that advocates using a low interest mortgage to free up capital to invest elsewhere. The ability to deduct the mortgage interest on your tax return adds to the appeal of this strategy. However, if alternate investments don't end up returning a higher rate than the mortgage the strategy will backfire. Furthermore, the mortgage interest deduction is subject to changes in the tax code, and for households that do not itemize deductions or have small loans the deduction doesn't add up to much, if any, tax savings in the first place.
Invest Your Money
You probably want to take a similar amount to what you had been paying monthly for your mortgage and invest it. Whether you're saving up for a bigger future home, for children or for retirement, the freedom from mortgage payments brings opportunity for other investments.
- Washington Post: Even After Paying Off a Mortgage, Some Papers are Worth Keeping
- New York Times: Your Home – Disposing of a Paid Up Mortgage
- San Francisco Chronicle-SF Gate: The Consequences of Not Paying Property Taxes
- Federal Citizen Information Center: Insurance – Homeowner and Renter's
- Tax Foundation: Fiscal Facts – Tax Savings from Mortgage Interest Deduction Vary Significantly from State to State
- Bankrate: Making Extra Mortgage Payments vs. Investing
Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.