As a followup to Friday’s post about having paid off our mortgage early, I wanted to spend a bit of time talking about how things will be different in the absence of our mortgage. What follows are the three biggest issues we’ve come across thus far.
No more escrow
As most anyone with a mortgage is aware, your mortgage is made up of four primary components: principal, interest, taxes, and insurance. The principal and interest payments are kept by the lender, whereas the taxes and insurance typically go into an escrow account that the lender maintains on your behalf.
The reason that it works this way is that your lender wants to be 100% sure that your property taxes and insurance premium get paid. Once you pay of your mortgage, however, you’re on your own. Thus, you’ll need to contact your insurer and ask them to begin billing you directly for your insurance, and you’ll also need to stay on top of your property tax bills.
Increased cash flow
Several readers have asked what we intend to do with the increased cash flow that accompanies a paid off mortgage. In the short run, we’ll likely focus on investing what we would’ve otherwise been sending to our mortgage lender. In the long run, the lack of a mortgage payment provides us with significant flexibility when it comes to lifestyle decisions.
Of course, as noted above, we’ll no longer be paying into an escrow account. Thus, it will be important to consistently set a bit aside to cover our homeowners insurance and property tax bills.
Of the tax advantages associated with home ownership, the mortgage tax deduction ranks near the top. For those that are unaware, you get to reduce your taxable income (with some limitations) to the extent that your mortgage interest and other deductions exceed the standard deduction.
Beyond effectively reducing the interest rate on your mortgage, the mortgage interest rate deduction helps you get over the standard deduction hump, which has an impact on the tax treatment of other financial decisions — such as charitable contributions.
In fact, the loss of the mortgage tax deduction is the main reason that I recently started investigating donor-advised funds. Instead of donating a set amount each year, we may begin donating twice that amount in alternate years.
This strategy will maximize the tax benefits of our charitable donations, and the use of a DAF will remove the urgency associated with making those donations.