Life Without a Mortgage
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FacebookAs 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.
Tax planning
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.
Published on January 18th, 2010 - 15 Comments
Filed under: Mortgages
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About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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15 Responses to “Life Without a Mortgage”
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January 18th, 2010 at 10:04 am
I think you’ll find that the tax advantage to deductible mortgage interest isn’t that big of a deal. I think a very good post for you would be to compare your total tax bill with after tax income before and after having a mortgage. In my case, after paying off my house, I found I was paying about $9,000 in interest to save about $2,500 in taxes. My after tax income increased after paying off the mortgage.
January 18th, 2010 at 10:37 am
Nickel) Managing your own account for taxes and insurance isn’t really a big deal. I’ve never had escrow on my mortgages.
What I do every month, is send 1/12th of my estimated tax and insurance costs ($450) to an interest bearing FDIC insured savings account (I use Ally currently). Pay it like a bill, to yourself, in a savings account. This way when the tax-bill comes due, you already have the cash saved up.
When my mortgage is payed off, I expect to use 2-3 months of the ’savings’ to fix up the house / small remodels. Again, congratulations on being debt-free!
January 18th, 2010 at 10:40 am
Congrats on paying off the mortgage. I think you’ll like the donor advised funds and if you don’t like them, perhaps the Five Cent Nickel Charitable Trust or the Five Cent Nickel Foundation will be coming soon.
One idea you might consider is a charitable remainder trust that would pay you an income (for property taxes and insurance, for example) and the remainder would go to a charity of your choice when you pass away. You also get a nice deduction on your taxes.
January 18th, 2010 at 11:00 am
I agree with comment above: you will probably find that the tax deduction is not that big a deal. In fact, i read that in many part of the country, most mortgage-holders don’t benefit from the deductibility because they are under the standard deduction.
I figured out that my mortgage deduction only “saved” me a couple of hundred dollars a year. At that point, I accelerated payments.
What a relief.
January 18th, 2010 at 1:10 pm
EZ: I agree that people tend to over-value the mortgage interest deduction as, depending on your other deductions, at least a portion of it goes toward getting you over the standard deduction (and thus isn’t truly deductible).
January 18th, 2010 at 1:53 pm
“Instead of donating a set amount each year, we may begin donating twice that amount in alternate years.”
Thats a smart plan. If your charity giving is the difference between it being worth itemizing versus taking the standard deduction then piling your charity in alternating years will maximize your tax benefit.
January 18th, 2010 at 3:13 pm
Congrats… what a great position to be in. I hope you consider selected investments with some of the extra cash flow. Cheers!
January 18th, 2010 at 5:11 pm
Congrats Nickel – what a great feeling this accomplishment must be! Im looking forward to it myself at some point.
January 18th, 2010 at 6:38 pm
What an accomplishment!!
Not having a mortgage payment is one of the biggest steps of financial freedom. I can’t wait until my mortgage is paid off.
January 18th, 2010 at 10:38 pm
Nickel,
Congratulations on an amazing achievement! Our mortgage is basically our only debt and it’s high on my list of priorities. We pay additional principal monthly on top of the biweekly payments (to add an additional payment each year). I’m waiting to reach the point where we can sell our lake house (which is paid for) and be able to pay the mortgage off on our primary home. Whether we do that or not isn’t important, but having the option to is what I am excited for.
I also agree that the interest deduction isn’t quite as big of a deal as many people make it out to be. Like EZ states above, the tax benefit isn’t as great as the total interest. The amount of lifestyle flexibility far outweighs any tax benefit, in my opinion. Anyway, great job and congratulations again!
Hazzard
January 19th, 2010 at 5:43 am
I second BG regarding escrow. We don’t have escrow on our mortgage. We have about 1/10th automatically deposited into an ING account each month. I like to have a little more put aside for any tax or insurance increases that may occur. If everything remains the same for the year, we’ll move the extra funds into one of our other ING accounts.
January 28th, 2010 at 5:09 am
What about the clam bakes every evening and the limbo dancing over your front porch.
Seriously, I’d be totally ecstatic for weeks.
Congtratulations.
March 22nd, 2010 at 12:54 pm
Dear Nickel,
Thanks for all of your posts!! This is the first time that I have encountered thinkers that promote and celebrate mortgage free goals. I have been fighting my spouse on this concept for ten years. He has been taught that it is better to have liquidity and tax deductions and that paying off the mortgage is “dumb”. After ten years of marriage he is moving to my side of the court and we are now working together to pay off the mortgage while continuing to max out our 401K contributions. What is suffering is the fast food and entertainment fund. Our children are used to hearing “no” when it comes to the latest toys, they are used to garage sales and second hand stores while still enjoying private schooling and having savings accounts at early ages. Like my parents I hope to set the example of a comfortable paid for home while we begin to focus on a college fund in while they are in high school. I remember coming home with a homework assignment about home mortage and scrowing and my father said “tell your teacher we don’t have any of that” Of course I was accused of making excuses for not doing my homework, the teacher said, “everyone has that”. By the way I too was raised on a low fast food fund, a low toy budget and second hand clothing budget and I survived just fine. No college loans, no debt, no weight problems. It is possible to pay off the mortgage and save the future on a budget but something does have to give. I look forward to future postings and advice on the slow way to wealth.
Thanks, Thrifty
May 24th, 2010 at 4:14 pm
We can’t wait to be mortgage free. We’ve been making regular principal payments for the last 4 years, basically living on my husband’s salary and using mine to pay down the principal. According to our schedule, we’ll have the house paid off by August. We have plenty of savings (about a year’s worth of expenses) and max our 401k contributions. Our dilemma now is do we tap a bit into our savings and pay it off now (that would leave only 6 months of living expenses in our savings if we did that) or just wait until August. I’m so impatient, and the fact that we could easily pay it now excites me. But my husband doesn’t want to go below a year’s worth of living expenses right now. It would only take a few months to build it back up. And the interest we’d save paying it off now is really inconsequential. We’re just not sure if we should go ahead and pay it off now or wait.
June 9th, 2010 at 12:56 pm
Follow-up: We decided to go ahead and pay it off a couple months ahead of schedule. We received our payoff statement and will be making our final payment THIS month. So excited. The only thing that irks me is we have to pay by cashiers check; our personal check is no good for a payoff. That just doesn’t make any sense to me. Oh well. It took us a little less than 4.5 years to be mortgage free. All the sacrifice has been worth it!