Debt Management

Mortgage paid off? Weigh your windfall choices carefully


With a last mortgage payment made, he wants to get a bigger house, she wants to consider other possibilities

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Question for the expertDear New Frugal You,
Unlike so many of our friends, a few years ago we didn’t move to a bigger house. We stayed where we were. Now because of that, and we prepaid principal, we’re about to be mortgage free! Here’s the question: My husband thinks that we’ve outsmarted the market. With both house prices and interest rates down, he believes that now is the perfect time to move up to a bigger, more expensive house. I’m looking forward to being debt free. Who’s right? — Sabrina


Answer for the expert

Dear Sabrina,
Congrats on paying off the mortgage! All your frugal efforts are paying off! I’m sure that you’re proud. And, as your husband has discovered, not being in debt does allow you to consider other opportunities that you wouldn’t otherwise have. In this case, you have the chance to buy a more expensive home if you want.

Your husband is not alone. In recent decades, many people have wanted bigger homes. According the National Association of Home Builders (NAHB), from 1970 to 2000 the average home grew 50 percent to 2,265 square feet. However, the current recession has stopped that trend. NAHB currently predicts that the average home will be 2,152 square feet in 2015.

Part of that bigger home boom was the belief that your home was a good investment, a belief buoyed by their constant appreciation, until the recession reminded us that what goes up can come down. With home prices remaining in retreat for years in most areas, few believers remain in the cult of never-ending house appreciation.

That doesn’t mean that owning a home is a bad thing. Building equity in your home can be a good way to accumulate wealth. Real estate salespeople rightly claim that in a steady market it can be wise to own a home rather than rent one.

There are nonfinancial reasons to want a bigger, nicer home, too. Comfort and pride of ownership come to mind.

But there are some questions to ask about why you’d want to move to a different home. For instance, why do you want a bigger, fancier home? Is it something that you really need? Or just something to stroke your ego? How you answer those questions will affect the decision you make.

Let’s see if we can’t help by considering some of the options you have available to you. For sake of illustration, we’ll suppose that you were sending the mortgage company $1,000 per month. So that’s how much you have available now. You can choose to use it any way you want.

We’ll begin by considering how much more house would $1,000 a month buy? Depending on your interest rate, you could buy a home that’s worth about $160,000 more than your current abode.  If you do choose this option, I’d advise not using the entire amount on house payments. Save some for upkeep and repairs. Those costs will routinely go up on a bigger, fancier home.

Another option would be to add the money to your retirement funds each month. Many people, especially those nearing retirement, are concerned that they haven’t saved enough.

So the logical question is how much would that $1,000 a month be worth at retirement. The answer depends on how long you have until you retire and how much the money earns each year until then. To illustrate, I’ll assume that you have 20 years until retirement and earn a fairly conservative 6 percent per year on your investments. Our calculator shows that you’d have accumulated over $464,000.

You could split it up. Perhaps set aside $300 each month toward your next auto purchase. If you did that for four years and earned just 2 percent, you’d have $15,000 ready for a new set of wheels.

Or maybe you’d like to set aside $300 to $400 each month for home repairs and upgrades. Your current home might look at lot better to you if you were continually making it better.

And, maybe just for fun, you’d like to set aside $200 per month in a vacation account. That could make for some great family memories each year.

I’m sure that you can think of many ways to spend or invest the money. The main point is that the sacrifice you made to pay off the mortgage has put you in a position where you have an extra amount of money each month. It’s almost like getting an additional paycheck each month. People who are trapped in mortgages don’t have those options or opportunities.

What would I do with it? Unless the bigger, nicer home was needed, personally I’d agree with you. I really dislike debt. Debt is a little like trying to go through life wearing shackles. Your movements are limited.

Of course, I’m quite happy with my home. Your situation might be different. So sit down with your husband and consider the alternatives. You have created a wonderful frugal opportunity. Now’s the time to let it work for you!

See related: Understanding compounding interest, 3 ways to pay off your mortgage early

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