An inheritance 2X or more than your mortgage - pay it off?

[luvavacation]

As much as I wish this was me, it isn't, but it is a close relative to me, and an ongoing discussion the last few weeks amongst us.

Say someone wealthy passed, and you had an inheritance coming. You live a lower middle class life for your area (but in other parts of the country, you would be middle class).

Say you have a mortgage and a home equity line of credit (used to improve home), but this is your only debt. College is also looming for the children.

Say the inheritance is 2X (or a bit more) of your mortgage. You would like to move in a couple of years to an area with a lower cost of living and better weather. Would you use the inheritance to pay off your mortgage, investing the rest until the kids need it for college in a couple of years?

Or would you invest all of it, with the thought that when you do move, you could pay cash for whatever you purchase, and hope that the money increases while it is invested?

The financial advisor for the estate would prefer all money remain invested, but my relative thinks the advisor just doesn't want to part with the money.

Or would you have a wild spending spree, buying everything you ever wanted for your home and family, taking a vacation with no thought to cost, figuring you have lived frugally all your life so far, it is not hardship to continue living frugally after the spending spree?

I would love the wild spending spree (but that is easy, it isn't my money!), but my friend says invest it all for the future, which is probably the way my relative will go, but I wonder if this is best? What would your financial guru tell you?

 

[Eastern]

It probably depends in part on what it is invested in now.

I think I would probably pay off my mortgage. Some colleges do not count home equity when determining aid so it might be helpful if they knew where their kids were going.

 

[arihillfarm]

How much time is left on the mortgage? 30 year or 15 year mortgage? What is the current interest rate on the mortgage vs. the interest that the investments are earning? If the mortgage interest is less than investment earnings, then it's a no brainer to stick with the mortgage. I'm going to guess that the inheritance amount is in the neighborhood of $250-300K. If that's the case, keeping it invested at even an 8% annual return would yield $20-24K a year in interest/investment income without touching the principal. I could continue to live frugally and do A LOT with an extra $20K a year to include paying off the current mortgage early, saving for college educations and even a down payment for that next house.

-Astrid

 

[RitaE]

As much as I wish this was me, it isn't, but it is a close relative to me, and an ongoing discussion the last few weeks amongst us.

Say someone wealthy passed, and you had an inheritance coming. You live a lower middle class life for your area (but in other parts of the country, you would be middle class).

Say you have a mortgage and a home equity line of credit (used to improve home), but this is your only debt. College is also looming for the children.

Say the inheritance is 2X (or a bit more) of your mortgage. You would like to move in a couple of years to an area with a lower cost of living and better weather. Would you use the inheritance to pay off your mortgage, investing the rest until the kids need it for college in a couple of years?

Or would you invest all of it, with the thought that when you do move, you could pay cash for whatever you purchase, and hope that the money increases while it is invested?

The financial advisor for the estate would prefer all money remain invested, but my relative thinks the advisor just doesn't want to part with the money.

Or would you have a wild spending spree, buying everything you ever wanted for your home and family, taking a vacation with no thought to cost, figuring you have lived frugally all your life so far, it is not hardship to continue living frugally after the spending spree?

I would love the wild spending spree (but that is easy, it isn't my money!), but my friend says invest it all for the future, which is probably the way my relative will go, but I wonder if this is best? What would your financial guru tell you?

If I planned on moving in a couple of years, I wouldn't sink the money into my mortgage. That goes for me personally especially because out in our neighborhood it still isn't uncommon for houses to sit on the market for years before selling. I'd could be tying that money up for a very long time.

Wild spending spree sounds good. Just kidding.

If my mortgage was at some awful interest rate, I might use part of the money to get it refinanced down to that 2.whatever percents I'm seeing now and then I'd pay the minimums until house sale. I'd have to run the numbers to see if that made sense.

 

[YO's Mom]

Paying off the mortgage isn’t a good idea. First of all, you lose the income tax benefits that having a mortgage provides. So, right away, your income taxes increase. In my state, you can claim a mortgage exemption for your property taxes – no mortgage = higher property tax. It is smarter to keep the money invested and set up an account where the monthly mortgage payments can be paid via an automatic withdrawal. You don’t want all of your money tied up in your house. It is better to have it available for whatever other situation comes up. Now paying off other bills (credit cards etc.) would be a good idea. So, maybe take out some cash to get debt free (expect for the mortgage) and maybe some to have a little fun, then leave the rest where it is.

But that's just what I would do. Everybody has to do what works for them. If you are the type who would nickle and dime yourself broke . . .

 

[ceecee]

I think it depends on how long they plan to stay at current property, also what their other debts are. If they have cc debt, I'd pay that off asap as well as any other outstanding debts. Then think about what's left. A wild spending spree is why no one has $ long! Do people honestly think that way???

 

[Eastern]

If that's the case, keeping it invested at even an 8% annual return would yield $20-24K a year in interest/investment income without touching the principal. I could continue to live frugally and do A LOT with an extra $20K a year...

-Astrid

Tell us all where we can get this 8% annual return

 

[ICF]

If the inheritance was 2X my remaining mortgage balance, I'd pay off the mortgage without a second thought.

You would still have half of the inheritance money to have fun with, invest or whatever.

That tax deduction you get is not worth paying interest on the loan. Think about it this way...if you pay $10,000 in mortage interst a year, you are getting what....$2500 back? You are out a net $7500 from paying interest. Or...you just pay off the mortgage and while you don't get the $2500 you also aren't paying the $10K in interest up front.

 

[Colleen27]

I'd pay off the mortgage. Our investments aren't doing so wonderfully of late (8%? I wish!) and besides, when those kids start college the FAFSA doesn't look at home equity but it does assume invested funds are available for educational expenses. If they're lower-middle/middle class the tax benefits of a mortgage aren't all that either, most likely a 25% "rebate" on the interest they're paying.

If they feel they don't have enough savings for retirement, college, or whatever, they can "pay themselves" with the money that is no longer going to mortgage payments to shore up those other accounts over time.

 

[crisi]

It depends on how much risk tolerance she has.

The other aspect is cash flow....without a mortgage payment each month you have more money in each paycheck, and need less money to survive if you face an emergency like job loss or illness. If you invest it and the job loss comes as part of a market crash, you can be really screwed.

The cash will certainly be a factor when college loan time comes, the home equity may not be.

 

[Ashlotte]

This exact scenario actually did happen to me. (I know it sounds lucky, but as it required me to be parentless in my 20's, it wasn't that great). Anyway, I did use the money to pay off my mortgage and it was wonderful. Your friend can use the money she would have been paying towards her mortgage every month to invest. To me it was more of an issue of independence- I hate owing money on anything, even a home. I loved being 100% debt free. Since that time we sold that house and used the money to put into a down payment buy a new one (larger and costlier, but much better schools), so now we have a mortgage again, but I will definitely pay it off early in some form or another. It was a very liberating feeling.

 

[MomToOne]

It depends on what else is going on in their financial lives.

What's the plan for the kids' college expenses? What state is their retirement in? What's the interest rate on their mortgage? Do they have difficulty paying it? Is there a chance they might lose a job anytime in the near future? Do they have other elderly parents/relatives that they may need to help support in a few years?

This is what financial advisors are for. A good one will take a look at ALL things financial, even many you might not think about, and figure out what the best plan is. If your relative doesn't like the advice she's getting from the current one, then she should seek out a different one (or two) to see what they say. Just don't pick one that gets paid via commission on any investments they get you to make - pick one that charges up front (usually a % of the amount being invested). I'm sure you could also get basic consultations with some charged at an hourly rate.

Also - if the money is in an inherited IRA, I believe there are some significant tax benefits to leaving it invested. Your relative needs to find out what tax implications there are to taking the money out of the investments. Again, a financial advisor is VERY helpful here to sort all of that out.

I personally am looking at a similar situation probably within a few years. My plans are to dump almost all of it into savings/investments targetted for my retirement. I have more in retirement than many people, but I know it's still not enough to cover me if I live to 90+.

 

[Cheshire Figment]

Paying off the mortgage isn’t a good idea. First of all, you lose the income tax benefits that having a mortgage provides. So, right away, your income taxes increase.

This comment is so wrong!

Let's say that with a combined Federal and State Income Tax rate of 35% and your current interest amount from the mortgage is $10,000 for a year.

Taking this separate from everything else, would you rather pay no mortgage interest and $3,500 Income tax, or pay $10,000 mortgage interest and no Income Tax.

Looking at it this way makes it a no brainer. I have always advised my tax clients to pay of the mortgage. Then they can continue to make the monthly mortgage payments into an investment account.

Mike (CPA Retired but still doing individual taxes professionally)

 

[moonpie85]

No. I absolutely would not pay off my mortgage. Mortgages are beneficial. If I had any other debt I would pay it off but it sounds like you have none

Edit: The guy above me probably knows better than I do lol...so I guess pay it off. I have just always heard not to from the "gurus" on tv.

 

[labdogs42]

I'd pay it off. Just because it would be such a joy not to think about it anymore. And then I could invest monthly and enjoy the benefits of dollar cost averaging instead of trying to invest a whole heap of money all at one time.

 

[kathie859]

Paying off the mortgage is a wonderful feeling; however if you have a low interest rate and plan on moving with 2-3 years, I'd invest all the money.

I've never been sold on the "benefit" of not paying one off to have an interest deduction on taxes.. Wouldn't it be better to not pay interest in the first place and invest in something that pays YOU interest or dividends?

 

[lorax123]

I think about this hypothetical alot.... whiever said invest it for 8% annual return, I'd live to know where that is. Stocks? Sure... But I'd pay the mortgage off, split the difference in half, use some of that for a dream trip to Japan, put some aside for the kids then invest the reminded, including half of my 'ex' monthly mortgage payment. The other bit of mortgage payment would be save up for a future move out of current house once we get more income.

Why invest all of a windfall, possibly lose it, when you can guarantee you own your home and as long as you pay those property taxes, you have that to live in until you die. Seen people lose big sums of money and have nothing to show for it.

 

[luvavacation]

So many interesting ideas! Thank you all for some more discussion topics! I am going to send my relative a link to this discussion so she can drive herself nuts over what to do even more than before!

I don't know what their mortgage interest rate is, we never got around to thinking about that! Mostly just wondering if it was worthwhile to pay off a home you don't plan on staying in for more than a couple of years, or just going another route. A previous poster did make an observation that if the home doesn't sell, the money is tied up for however long it takes. That is certainly a thought that may play into what my relative does.

The advice on finding an investor that charges a flat fee, not tied to commissions, is something I am going to look into for myself! We have money invested with my DH's family's advisor, and I just don't like it. Although, it is my DH's family money, so I guess it doesn't really matter what I think (it is set up so no spouses can touch the family money - supposed to protect the money in case of divorce)!

I was kind of hoping everyone would say spend it all on a big vacation, and I would have to go with my relative to be "tour guide"! Darn, probably not a great idea. Oh well, thanks anyway for all the great information, I am sure my relative and I will have lots to talk about the next few days!

 

[arihillfarm]

Sorry, I just averaged the YTD annual returns from TIAA-CREF for accounts that I have and came up with 7% for this year. I'll have to look at my final quarter 2011 statement to be sure, but I believe last year was better than that. With a 3% mortgage interest rate, that's 4% more than what you'd pay in interest. I don't know about IRA rates because I don't have any. My kids' 529 plans are similar, paying more in interest than what we pay in mortgage interest. The only issue I see with paying off the mortgage is having the discipline to pay yourself back every month what you were making in mortgage payments, into an investment account. It's a lot harder mentally to touch a large sum of cash already invested, but an extra $1000 a month or so can be easily rationalized away and spent long before it hits an investment account.

-Astrid

 

[arihillfarm]

A previous poster did make an observation that if the home doesn't sell, the money is tied up for however long it takes. That is certainly a thought that may play into what my relative does.

That is a very good point. Having the cash available would allow them the freedom to purchase almost any property that caught their eyes and write a great offer without any loan or need to sell contingencies. That alone could save them some money on the purchase price as long as they are financially able to maintain two houses for however long it takes to sell the first house.

-Astrid