Lump sum of money - pay off house or invest?

[pearlieq]

If their mortage is at a low fixed rate I would absolutely invest it!

Paying off the mortgage doesn't mean much to me. It's not like I can sleep better at night thinking "At least I can never lose my home". You still owe taxes and utilities and will always need to come up with that.

Investing the money in a balanced portfolio will very likely return much more than the interest rate on the mortgage and would also offer them an extra safety net.

Being able to think "Well, at least if things ever got really bad we could liquidate the portfolio and use that to live on" would offer me much better sleep than paying off the mortgage.

As to how the decision should be made, it should definitely be a joint decision for the couple. Marriage is a partnership and I'm sure they can come up with a compromise.

However, if push comes to shove, the final decision should be hers and he should respect that. Either idea will improve their financial position--it's not like he wants to invest it and she wants to play it on the ponies.

 

[pearlieq]

You never ever want to put a lump sum into something as volatile as stocks.

Uh, maybe in opposite town?

This is why, for all the opinions offered here, you never, never, never make financial decisions based on what people have to say on a message board.

 

[testifyoncruises]

Uh, maybe in opposite town?

Nope not at all.

You just cannot time the market at all. The OP could put in all $200K right now and the market could and will tank again. Not tomorrow but maybe sometime soon. However through dollar cost averaging, you are gaining more and more buying power on the way down. It is just simple math. You are going to gain more over time putting in the mount of your mortgage than one small lump sum. Besides depending on the age of the OP's friends, they could be putting in far more then $200K over time based on just their mortgage.

For many, the psychological feeling they get with a paid off mortgage beats any thing in the material world.

 

[Sparx]

Pay off the house, invest the rest, and put what USED to be paid on the house monthly into retirement funds. Problem solved.

this.

 

[OceanAnnie]

While this is often said, it is often said in context -- "except perhaps a mortgage on a first home". A lot of that has to do with the ability to deduct mortgage interest. Another consideration is whether you need the money more liquid, in case of a job loss.

While there have been times, in the past, when it was right for some people, right now is perhaps the first time in history that paying off a big mortgage makes sense for a lot of people. The real question, though, is which people, which circumstances. That's the context of the OP's question IMHO.

This thread makes it real clear to me that there really isn't a right answer. Reasonable people disagree, and about something like this, where it is really about numbers to a great extent, that means to me that there is no way to know what the right answer is. Very scary.

We're in the same situation, with just about enough cash around to pay off the house, but it won't leave us with much cash left "just in case". We'll make it back, of course, over ten years or so, but is that too long to live perhaps without a strong-enough safety net?

I agree.

Another consideration is what investments? High risk or not? Right now, I'd be conservative. But that's my take. It's a lot to consider. I agree with MerMaid02, I'd probably see a financial adviser and get a forecast of if-then scenarios. Try to see the best plan to come out ahead.

I have to say, my first thought was to split the money down the middle. Pay 1/2 off the mortgage off and park the rest in an interest bearing account(s). But I really don't know what I'd want to do. Just a guess. And DH would have to be on the same page. Nice "problem" to have though!

 

[ksjayhawks]

Pay off the house, invest the rest, and put what USED to be paid on the house monthly into retirement funds. Problem solved.

Just what I was going to say! Only want to add to pay off all debts and then invest the remaining money, putting 6 months of income in a fund that they can get to if needed.

 

[Planogirl]

I would pay off all debt unless they have a very low interest loan of some kind and then I might leave that debt alone. I would not pay off car loans either. Otherwise I'd pay off the house note and invest the rest. Then I'd set up an automatic payment into savings.

 

[KramBerries]

Nope not at all.

You just cannot time the market at all. The OP could put in all $200K right now and the market could and will tank again. Not tomorrow but maybe sometime soon. However through dollar cost averaging, you are gaining more and more buying power on the way down. It is just simple math. You are going to gain more over time putting in the mount of your mortgage than one small lump sum. Besides depending on the age of the OP's friends, they could be putting in far more then $200K over time based on just their mortgage.

For many, the psychological feeling they get with a paid off mortgage beats any thing in the material world.

I think you guys are talking passed each other. On one hand, I agree that historically the stock market produces higher average returns than the interest charged on mortgages, so the odds say that you'll be better off putting the money in the market rather than the mortage. The problem is that the stock market is more volatile than a fixed rate mortgage, so that investment carries more risk. Some people advise using dollar cost averaging as a way to partially mitigate that risk.

A smart investment decision should never be made on the simple basis of maximizing return. You need to factor in risk levels. The OP did not provide sufficient information to assess the appropriate trade-off between risk and expected return.

I think the recipients of the lump sum should give it all to me in return for a future incarnation of myself granting them an extraordinary increase in karma in their future lives.

 

[Disney Doll]

I probably would not pay off my mortgage right now. It's a very manageable number at a good interest rate and I don't have too many more years to go before it's paid off.

I would probably put one year's worth of living expenses into an account that would get me the best interest possible and also be relatively accessible without a penalty should the need arise that I had to access it.

I'd pay off all credit card debt.

I might take a little trip. And I don't mean an around the world cruise...I mean a little trip...say no more than $5000.

The rest I would invest.

 

[luvmarypoppins]

I would pay off the house and then put the other $80,000 in tax free municipal bonds. That way you would get a yearly pay out of $4,500 at 5% approx. with no taxes for state and I dont know about federal, but you would still have the principal too.

 

[Tink0374]

Pay off the house and invest the rest. My family went through a similar situation years ago and we DIDN'T pay off the house. We've regretted it ever since, especially now that the economy is so bad and our hours at work have been cut back.