Paid Off Your Mortgage Early? 3 Things to Do With That Extra Cash

Knocked out your home loan ahead of schedule? You have some options for making good use of your savings.

Many people sign a mortgage and wind up paying it off over 30 years, or however long their loan term is slated for. But what if you've managed to pay off your home loan ahead of schedule? If that's the case, going forward, you won't have to come up with the money for a monthly payment, which means you have a prime opportunity to put that freed-up cash to good use. Here are some of your options.

1. Boost your emergency savings

Your home may be paid off, but that doesn't mean things won't break within it in the coming years. That's why it never hurts to have a strong emergency fund as a homeowner. And now that you're not paying your mortgage lender every month, you can put some of that money into your savings account so you're protected when unplanned bills strike.

2. Sock away money for your children's education

If you have kids who are headed to college, you're probably aware of just how expensive it can be. Now that you're not on the hook for a mortgage payment, you can set money aside to cover those tuition bills. In this regard, you have some options. You can open a traditional brokerage account and invest that cash, or you can open a 529 plan, which offers some modest tax benefits but is a little more restrictive.

With a 529 plan, you get to invest money for education, and any gains in your account are tax free provided they're used for qualified expenses, like tuition. The upside of a 529 plan is that you can change beneficiaries on it, so if you have two kids and one decides to skip out on going to college, you can use your money for your other child without an issue. The downside is that if you withdraw money for noneducational purposes, you'll be subject to a 10% penalty on that sum.

3. Focus on building a retirement nest egg

You'll need money to cover your living costs in retirement, so now that you don't have a mortgage on your hands, it may be a good time to ramp up your IRA contributions. This is an especially good idea if you've been underfunding your retirement plan for the express purpose of knocking out your home loan sooner.

What's more, being mortgage-free may allow you to retire on the early side. But again, you'll need savings to support yourself during that stage of life, so the more money you can allocate to retirement, the better.

Does paying off a mortgage early make sense?

When you pay off a mortgage early, you save money on interest -- potentially, a lot of money. But there's an opportunity cost there. By putting that money into your home, you miss out on a chance to use it for other purposes, like saving for your retirement. If you can comfortably pay off your mortgage early without sacrificing on other goals, then that's not a bad thing to do. Just make sure you're paying off your home early for the right reasons -- and that you have a plan for making the most of your money once you no longer have a mortgage.