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

[lorax123]

You financial guys think of money in such a different way than us mere money mortals I admire how you guys think, but for me, money is big whopping pain in the ****. I'd still buck the financial advice and pay it off. Even if it's low interest and I was planning on moving. Less hassle selling, you can take out a mortgage until your place does sell and not have the worry of a buyer accepting your offer on contingency or the hassle of two settlements in one day.

 

[NYCDiane]

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?

The mortgage would be paid off and a part of the kids' college would be paid off. I wouldn't invest anything with the way the markets are running lately.

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.

Of course the financial advisor wants it all invested.... he needs money to play with and move around. Anyone who tells you to keep ALL your money invested does NOT have your best interest in mind.

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?

After paying my mortgage and LOC and putting away for 1/2 or 3/4 of the kids' college, I would go out and either take a dream vacation or buy things I've never been able to buy but always truly wanted.

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?

.

 

[ShortStuff]

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

Agreed, I want to earn 8%!!! With low risk, of course.:

 

[NYCDiane]

Agreed, I want to earn 8%!!! With low risk, of course.:

Madoff Investments perhaps?

 

[ShortStuff]

Madoff Investments perhaps?

 

[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

 

[crisi]

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

The money is tied up either way. Banks look at net worth, not just cash - and they'll have plenty of cash for the downpayment if the mortgage is only half the inheritance- unless they spend the rest of the money. They might need a mortgage on the new place to cover until it sells, but your net worth doesn't change in either scenario. (Well, it does, because if you pay off the mortgage, you don't have those interest payments and can set aside your mortgage payments into additional investment - so in two years you can have another $20k or more. You might get some return on the market if you keep the mortgage and invest - I get 8% on much of my money in just dividends - but then I bought a ton of stock in the Spring of 2009 - unless you have a time machine, that isn't happening).

I wouldn't want the cash sitting anywhere if I needed to fill out an FAFSA. I'd much rather have equity. Unless I didn't need the aid.

 

[labdogs42]

Oh yeah, a dream vacation is also in order. I thought that was a given in this scenario!

 

[pershing]

Pay it off. A mortgage interest write off doesn't beat homeowner security!

Lost job
Health issue
Another stock market issue

You never know what's gonna happen. Roof over your head becomes a big deal.

 

[TammyAlphabet]

I did have this happen to me. I paid off the mortgage and have invested the rest. We are taking a few more vacations with the extra income but mainly ours lives are pretty much the same. BUT the security of having a paid for home and a nest egg is priceless.

 

[crisi]

Oh yeah, a dream vacation is also in order. I thought that was a given in this scenario!

No, it really isn't.

We had a large inheritance - and the best circumstances - the relative who died was someone we barely knew. We paid down the house. We needed a new car badly. We adopted a child. The money we had left went into savings (we didn't pay off the house, just paid it down past the PMI point, paying off the house took another five years).

At no point during this did we thing "lets take a dream vacation" - we had far too many responsibilities pressing on us with a new house and a new baby.

With college coming up for the kids, a dream vacation now is going to mean more loans later. That might be a good trade, but for me, I'd rather skip "dream" vacations than have my kids living on ramen to pay student loans when they are 23.

 

[nunzia]

Something similar happened to me. I am paying off the rest of my mortgage and the rest is going into retirement after a couple home improvements (got a new refrigerator and will get new carpet). All our kids are grown and past college. I gave each of them a substantial chunk also. Other than that, pretty much no extra splurging. We already had everything but the mortgage paid off and were hammering at that pretty well. We will get more DVC points, but that's out of our normal budget.
However, if the person doesn't plan on staying in the house, I'd re-evaluate paying it off. Our house is our retirement house..we were on track to have it paid off in about 5-6 years anyway. If I had any thoughts of moving I wouldn't pay it off. We live pretty small (except for Disney). Older house in an older neighborhood, definately in the lower middle class range. We are lucky in that 2 of our 3 kids live within a half mile of us. Everytime I see a fancy car drive by or see a new big house I just think "Wow, I'm glad I don't have that payment to worry about..."

 

[mom2rose&john]

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)

I agree with this. If you can afford to pay it off then do so. Even if you put a third of the mortgage payment into savings you are increasing your net worth.

 

[nunzia]

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+.

This was the case with me. Inheritance IRAs have very strict rules, as I found out. You cannot just leave the money in the existing account, it must be rolled into a new one of your. You cannot add to the account, or mix the money with an existing IRA you might have. You MUST withdraw the cash as required by your age and projected life span. There are other withdrawal options..5 year/lump/etc. But the bottom line is that you can't just roll over the whole thing and leave it there. All money is subject to IRS taxes (for a Traditional IRA..a Roth is just treated as any other inheritance and I was able to get that paid out with no tax liability...each state is different so check). I chose, under advisement, to take out only enough this year to not bump much of the amount into the 25% tax bracket. Then next year I'll take out a bit more and enough to pay the taxes on this year's disbursement. After that, I'll take out only the amount subjected to 15% to put in my own Roth or other savings.