Last updated on November 17th, 2024 at 10:55 pm
Several years ago, I wrote an answer to a question on Quora, “What happens when you finish paying off your house?” Little did I know that this question would grow in popularity and be one of my most-read responses. It’s time to let you know more about what happened to me when I paid off my house. I hope you can gain some insight from my experiences.
My wife and I had decided to buy a new house that was closer to my office. We lived in southern California and my commute was horrendous. Not many miles but lots of time both ways.
We had planned to get a mortgage as it’s almost always been my philosophy that I wanted to gain the most from my money. Putting the minimum down and financing freed up valuable capital that I could use in my full-time business or buy properties.
We found a new house to buy
We found a new house that the builder had just reduced significantly, it was already built and they had trouble at that time selling them. After signing a contract we proceeded to get a mortgage loan. My credit was great, in the low 700’s. I had just sold my company to a large corporation and continued to manage it for them.
During the process, they were supposed to make some payments on credit cards that were in my name. They failed to do that and they showed up during the process as being greater than 30 days late.
“The ache for home lives in all of us, the safe place where we can go as we are and not be questioned.”
Maya Angelou
The loan fell through and I was faced with losing the house (they had a backup offer) or paying cash for it. The last thing I wanted to do was to use my extra funds and tie them up in a home loan. Well, you know what happened, I closed after paying cash.
Ok, it was nice not having to send a monthly payment and pay mortgage interest. I just put the monthly payment money back into my investment account. For the next three years, I left the situation as it was, zero loan balance. Was it nice not to have a mortgage?
I have to say that it was interesting. Since I would have invested the money and therefore would have had it to pay off the loan should I wanted in the future, it was just interesting.
There is no such thing as no house payment
Incidentally, there is no such thing as no house payment. When you pay off your house, consider taxes and insurance. Â If you do not set up your own escrow account for homeowners insurance and property taxes, you will have to dig deep to make those annual or semi-annual payments. Â When I was in California without a house payment, I was paying about $3,500 twice per year for property taxes plus over $1,000 per year for insurance. Â
Of course, property taxes in CA go up each year so you need to save every month from your income to cover these costs. My costs came to about $650 per month, a sizable amount. Granted, with no P&I payment.
If you pay off your house, you lose the interest deduction on your taxes but the standard deduction more than doubled in 2018 so that helps offset. The last thing you want is a mortgage just to get a small tax deduction.
As of 2022, approxiately 38.5% of U.S. homeowners own their homes outright without a mortagage. This is an increase from 2010 which was 32.1%. This change is attributed to baby boomers paying off their mortgages.
I never had the “final mortgage payment” experience that some have indicated because I paid cash for my new house up front.
Let me tell you what I did several years later.
I had worked on my retirement plan and we had decided to relocate from California to a place where it was very affordable to live. A place where we could have the lifestyle we wanted. Yes, we could have afforded to retire in California but why spend three times more on property tax, four times more on fuel, etc? I think you get the point, we wanted to be comfortable and live somewhere with the amenities we desired.
So, a few years after we purchased our house without a mortgage, we decided to buy a house on the beach in Mississippi. I have written a whole account of how that happened you can read about it here.
We decided to buy the retirement house using my veterans benefit so zero down. The builder covered closing costs so zero out of our pocket. Our interest payment was very reasonable around 3.5%.
We were able to buy our retirement house in Mississippi while still living in Southern California. Remember, I had no mortgage so financing was easy. We would move several years later but wanted to get this initial task out of he way.
I signed up for a mortgage on my paid off house
After we closed on the house in Mississippi, I incurred mortgage debt by financing my principal residence which as mentioned above, I had no mortgage loan on. The mortgage lender was charging about 3.5% also and for the first time on this house, I had monthly mortgage payments. Keep up with me now.
I gain a loan effectively for as little as 3.5%. Initially, I put the funds into real estate investment trusts averaging around 9-12% dividends. My investment style was not to get ahead of myself and commit to buying a property before I had the funds. Cash is king and a great tool for leveraging a purchase.
We moved to Mississippi and I became a real estate agent. I had wanted to become a real estate agent for many years. I had been a real estate investor on the side of my full-time business for many years.
My plan was to obtain a real estate license
After receiving my real estate license it was time to look for bargains. I had also decided to bring a few close friends in on my good fortune so we formed several limited liability companies for our investments. My job was to find, acquire, and manage them. With the financial stability of several individuals with credit scores in the mid 700’s it was time to find something.
We had decided to make a down payment of as much as 20% and work with a single mortgage broker who would manage our loans. Our plans were set on a five-year basis and we agreed to buy only income properties that would generate income in excess of the average stock market returns.
The first property I found was a beautiful house built in 1910 with a view of the beach. The house was fully stocked with furnishings and furniture. The owners had used the home as a vacation home after years of remodeling. I made an offer contingent on leaving everything in the house as it was. They accepted but wanted the dining room table. That was a good idea because we needed a table that would hold up better.
The first investment acquisition with the mortgage loan money
As the house was already set up, we decided to make it a vacation rental. It was listed on the main sites and within two days of closing, it had its first guest. I will get into the deal but first, you should understand that this house was a three-minute walk to the beach.
People could sit on the porch in rocking chairs and see the water and sand. The property taxes were very low relative to any place I had ever purchased in the past.
The property was about 3/4 acre with a giant yard and RV plugins. Perfect for large parties. And guests had many large parties and weddings at the house. It was sold just short of five years after the purchase. Here are the details:
Real Estate Transaction Overview
- Purchase Price: $215,000
- Down Payment: 20%×$215,000=$43,000
- Closing Costs: $6,000
- Seller Credit: $5,000
Initial Investment: $43,000+$6,000−5,000=$44,000
- Selling Price: $330,000
- Mortgage Payoff: $158,048
- Real Estate Commissions: $19,800
Net Profit Calculation:
Net Profit=Selling Price−(Mortgage Payoff+Real Estate Commissions)Net Profit=Selling Price−(Mortgage Payoff+Real Estate Commissions)
$330,000−($158,048+$19,800)=$152,152
Return on Investment (ROI):
ROI ≈ 345.8%
A nice return for a few years. I almost forgot the $50,000 rental income for each of several years which brought down the mortgage balance, paid the bills, and generated a nice income. We exceeded our initial goal. Just on this deal, with the lower interest rate on my home, I covered two years of mortgage payments.
We sold our original home in California
After we moved to Mississippi, we sold the home in California. You may recall, I borrowed against that home (our estimated equity) to fund real estate acquisitions. As it happened, we made more on the house than expected which gave us even more to work with.
You probably wondered what I did with the rest of our funds. They went to purchase several more properties all financed except for one which I paid for in cash. Before you say that I was going backward by paying for a property in cash, hear me out. This was a great opportunity, a house that needed a modest amount of work. A friend was selling because he needed the cash. We did the deal in two days.
I had to put $25,000 additional cash into the house to modernize it and make it a fully furnished vacation rental near the beach. The first full year it earned $48,000. With this income on the books, I went to my mortgage servicer/broker and talked about taking out a first mortgage.
Obtaining a first mortgage on a house without a mortgage is called “a refinance”, why?
For some reason they call it a refinance but since there was no mortgage I call it a first mortgage. Before I did anything, I listed the house on the MLS for $189,000. I will go into the details below. I took down the listing after three days.
Now, I have two things going for me. A former listing at $189,000 and significant income on the books. I found a house down the street near the beach for sale. The owner had received free money from the government 10 years prior to providing housing for low-income people after Katrina. When the house was 10 years old, it was his free and clear. As soon as I saw the listing, I knew it was a great deal.
I made a full-price offer and found the house next door, the same size but different floor plan was also for sale. I made an offer on that one too. My mortgage broker gave me a new 30-year mortgage on the original house when the appraisal came in at $189,000. I got a new mortgage on each of the two houses putting 20% down and all three were financed as business loans, not personal loans.
I borrowed from one house and bought two more
The loan servicer moved the money around using the loan to make the down payments and closing costs for all three. I received a big check for the balance which I used to repaint and do minor remodeling to the two houses including setting them up as vacation rentals with furniture and furnishings.
They started renting as soon as the deal was closed. The cash flow for all three was very good, enough to pay the bills and leave extra income which I retained in the business accounts.
The interest rate at the time was higher interest rate at 4.75% (compared to rates today that’s great). Regardless, the analysis that I ran on each property indicated that they would generate a net profit plus an increase in value. The loan term on each loan was 30 years. Because they all met my financial goals I did not need extra cash to keep them going in the slow winter months.
$182,000 profit on $107,000 invested.
I was going to show the math for the three-house deal and realized it was a bit complex so this is the upshot. I purchased all three for $341,000. They are worth $630,000. My original cash investment was $82,000 for the original house and another $25,000 for rehab costs. $107,000 invested.
About $182k return on $107k invested. All of this came from my home loan plus more considering the excess cash I took away and invested in another project.
My financial advice to anyone who asks is that your situation is not the same as mine. Do what is best for you. Make financial decisions about your primary residence based on what makes you comfortable. If you want to see that last payment, paying off your house may be the best thing for you.
Before you do, consider that if you find you do not have the ability to leave that money in your house and you are tempted to borrow later there will be costs. A mortgage company would be happy to give you a new first mortgage with interest costs.
Some people after paying off their house borrow against it in the future
Lots of people pay off their home and get a mortgage a few years later for a variety of reasons but most often it’s to buy something or expend that lump sum payout. Investing the money is one thing, a good thing because the income generated will help pay the payment.
If you are considering paying off your house today just to borrow against it in five years that may not make sense, no one knows what interest rates will be. Â This is particularly true for those of you who have very low interest rates now.
Again, your financial situation will dictate where you are and if it makes sense to pay off your mortgage. Perhaps feeling good is a reason to do it as some have commented on my Quora article. If that is what you need to manage your financial affairs, go for it. Don’t forget to factor in the opportunity cost of money. Check with a financial advisor before you make a move. Read more articles from actual financial experts.
Many people think that paying off their home mortgage is a lifelong dream. It is for some people. Everyone knows of someone who bought a home 30 years ago, never refinanced it and then one day it was paid off.
Risk
It would be irresponsible of me not to mention risks involved in any decision you make. The items listed below are the pros and cons for your review. These items are non-emotional items. They do not take into consideration the psychological benefits and reduced stress of being mortgage free.
Pros of Paying Off Your Mortgage
- Financial Freedom:
- Eliminates a major recurring expense.
- Frees up monthly cash flow for other investments or needs.
- Risk: Liquidity Risk – Tying up cash in a house makes it unavailable for emergencies or other opportunities.
- Interest Savings:
- Saves money on interest over the life of the loan.
- Risk: Opportunity Cost – You might miss higher returns from investments elsewhere.
- Peace of Mind:
- Reduces financial stress and provides a sense of security.
- Risk: Overcommitment – Paying off the mortgage could strain your finances if done too quickly or without proper planning.
- Improved Cash Flow in Retirement:
- Reduces expenses during retirement when income is often fixed or limited.
- Risk: Inflation Impact – You may lose the ability to grow wealth against inflation by prioritizing paying off a low-interest mortgage.
- Asset Ownership:
- Gives you full ownership of your home, increasing net worth.
- Risk: Asset Concentration – Most of your wealth could be tied up in one asset, limiting diversification.
Cons of Paying Off Your Mortgage
- Reduced Liquidity:
- Home equity is not easily accessible without selling or refinancing.
- Risk: Emergency Risk – Could create financial strain if unexpected expenses arise.
- Opportunity Cost:
- Extra funds could be invested in higher-yield opportunities (e.g., stocks, bonds).
- Risk: Lost Growth Potential – You could miss out on better long-term gains.
- Tax Implications:
- Mortgage interest deductions reduce taxable income if you itemize deductions.
- Risk: Higher Taxes – Paying off the mortgage may increase your taxable income.
- Low Borrowing Costs:
- Mortgages often have low-interest rates compared to potential investment returns.
- Risk: Underperformance – Your investments might not outperform your mortgage interest rate.
- Inflation Hedge:
- Mortgage payments become less burdensome over time as inflation increases your income (if not retired).
- Risk: Missed Inflation Benefit – You might pay off cheap debt in today’s dollars that could feel cheaper over time.
Risks of Paying Off Your Mortgage Early
- Cash Flow Tightening:
- If you divert too much to paying off the mortgage, you might lack funds for emergencies or lifestyle needs.
- Loss of Financial Flexibility:
- Paying off the mortgage is irreversible unless you take a home equity loan or refinance.
- Market Opportunity Costs:
- Missing out on potentially higher returns in the stock market or other investments.
Risks of Not Paying Off Your Mortgage Early
- Long-term Interest Costs:
- You may end up paying significant interest over the life of the loan.
- Economic Downturns:
- If your income decreases, the mortgage payment could become a burden.
- Uncertainty in Retirement:
- Fixed mortgage payments in retirement can strain a limited income.
Final Considerations
The decision depends on:
- Your current financial health.
- Your risk tolerance.
- The interest rate on your mortgage compared to potential investment returns.
- Your long-term goals, such as retirement, liquidity needs, or investment strategy.
Protect your assets
Should you decide to pay off your home, take some steps to protect your home from others who may want what you have. Should you be sued, the plaintiff can ask for your house to pay judgements. As you would have no mortgage, it’s an easy choice.
Create a revocable living trust. With the trust in place, create a mortgage where the you owe the trust for example 80% or more of the market value. File the mortgage with the county. This way if you are sued in court, your paid off house is tied up and a judge can not make the the trust sell it.
Read this article on this site for more information about this topic
I am not a professional financial advisor. The purpose of this article is to expose you the reader to what can be done with money that would otherwise pay off a home mortgage. Do not take this as financial advice without checking with a professional and reading more articles.
