4 Money Moves to Make After You Pay Off Your Mortgage

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Congratulations! Paying off your mortgage is a huge accomplishment, one that many people only dream about. Go ahead and celebrate, whether that means going out for a nice dinner or having a mortgage statement burning party.

But once the celebrations die down, there's a little more work to do in order to properly navigate your new post-mortgage life. The following four steps should help.

Re-estimate your income taxes

If you've been itemizing income tax deductions on Schedule A, including your mortgage interest, you may assume that paying off your house will lead to a higher tax bill. Maybe, but maybe not.

New tax laws that went into effect this year include much higher standard deductions — $12,000 for singles (up from $6,350) and $24,000 for married couples filing jointly (up from $12,700). So, depending on how much you were paying in mortgage interest, you may not even have to itemize anymore to get the same or higher deductions. On the other hand, personal exemptions have been eliminated.

The only way to find out for sure how becoming mortgage-free will impact your income tax liability, especially in light of the new tax code, is to run some numbers, perhaps with the help of a tax software package or by asking your accountant. Then, make sure the proper amount of income tax is being withheld from your paycheck. (See also: 12 Things You Should Know About the New Tax Law)

Redirect your bills

If you had been paying your property taxes and homeowners insurance premiums as part of your mortgage payment, you'll need to make sure those bills start coming directly to you. Your mortgage company may have made the proper notifications for your tax bill (although it's worth double checking), but you'll probably need to notify your homeowners insurance company yourself.

Remember to save for insurance and property taxes

If the previous scenario describes your situation — you used to pay your taxes and insurance as part of your mortgage payment — it's important to start saving for those expenses each month.

When we lived in the Chicago area, even though we had a mortgage, we paid our property taxes directly. I still remember receiving our first bill. I thought one of our kids had been kidnapped and this was a ransom note (Illinois property taxes are extremely high). Even in a lower-tax state, getting an annual or semiannual property tax bill can be a shock — emotionally and financially — if you aren't anticipating it.

What to do? Calculate one-twelfth the annual cost of your property taxes and homeowners insurance and transfer those amounts to a dedicated savings account each month, preferably automatically. That way, the money will be there when you need it.

Don't assume this money will just build up in your checking account since you're no longer making your tax and insurance payments along with your mortgage. Chances are, it won't. Mingled money tends to leak. Far better to put this money away in a separate savings account.

Redo your budget

Paying off your mortgage should give a nice boost to your monthly cash flow. Sure, you'll continue to have plenty of home-related expenses (as mentioned already, property taxes and homeowners insurance, plus maintenance and repairs), and you'll need to see how your income taxes will be impacted. Still, no longer having a mortgage payment will put more money at your disposal — probably quite a bit more.

As is true when getting an inheritance or a large income tax refund, it's essential to plan ahead. Otherwise, you could easily find yourself at the effect of Parkinson's law: Expenses rise to meet income.

So, think about your financial priorities. Could you wipe out other debts, such as student loans, by using some of your new cash flow to make accelerated payments? Should you direct some of the money toward your emergency fund, retirement savings, or your kids' college funds? Are there any expensive repairs or replacements you should be saving for?

It's fine to allocate some of your increased spending money for fun things, too, such as entertainment or vacations. But that spending will be more enjoyable if you first direct some of your new cash flow toward paying off other debts or building savings.

Again, congrats on becoming mortgage-free. Taking the steps described above should make the good feelings you're experiencing last well into the future.

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