logistics of paying off house vs financing

[arthur06]

I would vote for paying off the mortgage also.

The OP states that there is enough to pay off the house and quite a bit more. The real variable is how much more is quite a bit?

If there is enough to pay off the house and still have over $100,000 left, that is still very liquid with no mortgage to boot!

I also would look at it this way. If I leave my money invested, then I have to use "my" money to make the mortgage payments. No matter the choice you are going to be way ahead in the long run!

Good luck with your decision!

 

[Suz D]

I would vote for paying off the mortgage also.

The OP states that there is enough to pay off the house and quite a bit more. The real variable is how much more is quite a bit?

If there is enough to pay off the house and still have over $100,000 left, that is still very liquid with no mortgage to boot!

Good luck with your decision!

Yes, we'd have significantly more than $100,000 left in the investments which doesn't include "cash" assets such as CD's that must be cashed in now, checking account, and credit union savings account. We're keeping Dad's house for now (it's paid for) because he lives in the Las Vegas area and the market is so terrible. We're hoping to just rent it which will also be another small source of additional income that could be invested and later sold.

Again, I'm very appreciative of everone's input. I've never had this type of money "worry" before. I'm so very grateful, but want to make good choices that will allow us to literally "pay it forward" to our children and grandchildren.

 

[Suz D]

I think, as someone said earlier, there is no wrong answer here.* Leaving the money invested or paying off your mortgage are both good options.

*Well, there are some wrong answers. Buying a gold-plated Lexus would be wrong. But you didn't list that as one of your options so I'm assuming you're not considering that.

not even close. My DH's car is a bottom of the line Kia with absolutely no get up and go-we live in a somewhat mountainous area- so we may trade both his car and Dad's car in on a newer Toyota, but that's about it for big purchases. That likely will not run us more than $10,000 out of pocket (if that).

 

[cvjw]

We were in the same situation (not due to death, but due to a $ gift), and paid off our mortgage. It is a great feeling. We put the money that we would have sent to the mortgage company into savings. We did this about 7 years ago, and have not second-guessed our decision one time. In fact, we always talk about how glad we are that we paid off our mortgage. We still have lots of money in savings and stocks, and we own our home free and clear!

 

[SleepyatDVC]

It's not an all or nothing choice.

This is what I would do:
Pay off all other deft (if any) besides mortgage.
Increase emergency fund to 1-2 years
Fund all IRAs, etc.
Set aside funds for annual bills (insurance, taxes, etc.)
Put a lump-sum toward the mortgage ($10-50K)
Figure out how much extra a month I would need to add to my month;y mortgage payment to pay it off in 15, 10, x years and aim for one.
Keep as much of the remaining inheritance invested with withdrawals for the extra mortgage principal only.

The investments WILL be your retirement funds.
And will be available in case of a TRUE emergency. If you decide to pay off your mortgage in full later, nothing is preventing you to do that. However, it will be harder to re-finance to take the money out if you need it later on if you lose a job or something.

Paying off a mortgage is great. But home ownership costs way more than the mortgage - insurance, taxes, maintenance, home repair all costs money and seem to always be needed when cash is low.

Also if you have young children, I'd prefer to have the cash for college available then to take out a loan. Hopefully, the house will be paid off by then because you accelerated the payments, and you have freed up monthly income, AND you still have a chunk of change in investments.

My worry for myself and for many others is that when cash flow is less tight because the mortgage is gone, people "think" they will invest it in retirement, college, etc. but life intrudes and it gets spent way too easily.

 

[Anne34]

OP here...
Thank you everyone for being so kind in your replies. It was so hard to lose my dad but he had dementia and had been really declining in the last 2 years. He'd really been suffering over the last 5 months (the last 3 especially). I'm so grateful that he's finally at peace and is able to be with my mom. They were married 53 years when she passed away in August 2008.

Back on topic...if we make a large payment on the house instead of paying it off, that won't change our monthly payment amount but just reduce the length of time we pay on our mortgage (substantially of course) so we wouldn't be able to contribute any extra to retirement.

We live pretty much paycheck to paycheck without a lot left over. This isn't as bad as it sounds. We live fairly frugally and put a lot in savings every month (about 20% of our take home pay because my husband only gets paid 9 months of the year-college professor-so we have to plan for three months with no paycheck), plus we put 10% in our retirement account (through DH's work/they match so we didn't want to reduce that amount obviously), we have a fully funded emergency account, a savings account for unexpected but not emergency expenses (like vet bills, car tires, etc) plus we tithe 10% of our income and have no CC debt. Just not a lot for "fun" money. I don't want to touch the investments for our summer living expenses, but we'd need to save less each month during the school year to cover summer if we didn't have to make a house payment.

The more I think about it, the better paying off the mortgage sounds. It would be VERY nice not to have a house payment, invest say 2/3 of the house payment for retirement, and have that other 1/3 to ease the tightness of our budget. My DH is in his mid 40's so he hopefully has a lot of working years still ahead of him (and could work well into his 70's...loves what he does, not physically demanding, and by that time in his career it would not be as stressful to publish or perish). We have a 15 year old and a 4 year old. A bit of "fun" $$ while our children are young would be lovely. Does that sound sensible or foolish? And thank you again for your replies...feel free to keep the conversation going and the ideas coming.

I am another who would definitely say to pay off the mortgage. I bolded the part above that helps me make the decision. Having a bit of fun with the kids while they are still around to enjoy it is wonderful. Do something fun that you've never done before and enjoy them (esp. the 15 year old - time goes by way too fast!). You would still have some money saved for emergencies or college & you are freeing up your current payment to be used now.

 

[Suz D]

All of these are great suggestions. Blue is me (OP)

It's not an all or nothing choice.

This is what I would do:
Pay off all other deft (if any) besides mortgage. none
Increase emergency fund to 1-2 years planning to put 3 years in CD's for emergency fund from the non-investment $$ inherited (There is some cash-checking, savings, cds). If I understand correctly, the only thing you lose if you have to take the $$ out of a CD early is the interest you would have earned?
Fund all IRAs, etc. I have to check on this. I see the term "fully fund retirement" on here and don't really know what that means? We do put 10% in 401K and it's matched
Set aside funds for annual bills (insurance, taxes, etc.) We do this out of DH's monthly paycheck. So are you thinking take $$ out every year for that or just make sure we have that in our emergency fund? I figured those annual expenses in the 3 year emergency fund $$
Put a lump-sum toward the mortgage ($10-50K)
Figure out how much extra a month I would need to add to my month;y mortgage payment to pay it off in 15, 10, x years and aim for one. This was the thought that had been perking around in my mind. Since we really don't have extra $ in our budget to make a larger payment on our house I wasn't seeing how I could pay it off early just on what my husband makes. I'm resisting getting in the mindset of "it's okay to take $$ out of the investment account each month" but that would be the only way we could pay the mortgage off early. I don't want to get in a position where we are dependant on our investment income to meet our "new" monthly budget. Maybe I can just have a check sent every month from that account directly to our mortgage company. I guess my thought process on this is, if I'm going to use the investment $$ anyway towards the mortgage would it make more sense to do it all at once or withdraw it a little at a time since my mortgage interest rate is so low. This is definately a pro for the not paying off the mortgage in one chunk


t
The investments WILL be your retirement funds.
And will be available in case of a TRUE emergency. If you decide to pay off your mortgage in full later, nothing is preventing you to do that. However, it will be harder to re-finance to take the money out if you need it later on if you lose a job or something.

Paying off a mortgage is great. But home ownership costs way more than the mortgage - insurance, taxes, maintenance, home repair all costs money and seem to always be needed when cash is low. Totally get this one. We put $$ in a special account each month for those type of things but we could discontinue that and if a true emergency arises we'd have the $$ in our 3 year emergency account and could then go back to putting $$ in to replace what we spent. That would ease our monthly budget a bit if we didn't have to set that $$ aside monthly like we do now

Also if you have young children, I'd prefer to have the cash for college available then to take out a loan. Again I'm wondering about the term "fully fund college" that I read on the Dis. We do have quite a bit set aside for college for our oldest. $45000.00 which I know may not be enough but we still have 3 years to grow that Hopefully, the house will be paid off by then because you accelerated the payments, and you have freed up monthly income, AND you still have a chunk of change in investments.

My worry for myself and for many others is that when cash flow is less tight because the mortgage is gone, people "think" they will invest it in retirement, college, etc. but life intrudes and it gets spent way too easily. I think this is a valid concern. I'm frugal, but can see that extra $$ getting eaten up by wants that have suddenly turned into needs.

So basically the only things we have left to fund are college and retirement, plus paying on our house. I would like to put an addition on our house at some point (we definately bought within our budget and I'd love a little more space) but that wouldn't be for at least a year when we know if we'll be permanent here.

 

[lakelandgal70]

We just recently paid off our house. For us it was a no brainer. God forbid something were to happy to DH or he lost his job at least our house is paid for and we are protected. Especially in this whacky economy. But I agree with pp that you should talk with financial advisor to see if this is something that you should do. It can't hurt and would put your mind at ease.

 

[Jestocost]

It's not an all or nothing choice.

This is what I would do:
Pay off all other deft (if any) besides mortgage.
Increase emergency fund to 1-2 years
Fund all IRAs, etc.
Set aside funds for annual bills (insurance, taxes, etc.)
Put a lump-sum toward the mortgage ($10-50K)
Figure out how much extra a month I would need to add to my month;y mortgage payment to pay it off in 15, 10, x years and aim for one.
Keep as much of the remaining inheritance invested with withdrawals for the extra mortgage principal only.

The investments WILL be your retirement funds.
And will be available in case of a TRUE emergency. If you decide to pay off your mortgage in full later, nothing is preventing you to do that. However, it will be harder to re-finance to take the money out if you need it later on if you lose a job or something.

Paying off a mortgage is great. But home ownership costs way more than the mortgage - insurance, taxes, maintenance, home repair all costs money and seem to always be needed when cash is low.

Also if you have young children, I'd prefer to have the cash for college available then to take out a loan. Hopefully, the house will be paid off by then because you accelerated the payments, and you have freed up monthly income, AND you still have a chunk of change in investments.

My worry for myself and for many others is that when cash flow is less tight because the mortgage is gone, people "think" they will invest it in retirement, college, etc. but life intrudes and it gets spent way too easily.

I think this post is excellent. There are a couple of other things I would consider.

First, it's not a question of investments vs. paying off the mortgage. It's a decision about whether you want the extra $175,000 of your investments in residential real estate or in some other form. Because by paying off your mortgage that's really what your doing; shifting money from other investments into residential real estate. The mortgage certainly is relevant as there is a cost associated with it, but you really need to evaluate whether having $235,000 of your assets tied up in residential real estate makes sense for you. Just like any stocks, bonds, mutual funds, etc. there are pluses and minuses to investing in real estate and you need to determine if it's right for you.

Second, I'd echo that it's not an all or nothing proposition. You can make a substantial paydown of your mortgage balance without paying it off completely and you can do that in one of two ways. Which one might work for you will depend on your circumstances. A) You can just send it in and ask that it be applied to principal. This will significantly shorten the amount of time it takes to pay off your mortgage. B) In many cases, you can ask to have your mortgage "recast," which means the amount you pay (generally at least 10 percent of the unpaid principal balance) is applied to the outstanding principal BUT then the remaining balance is reamortized over the remaining term of the loan at the contractual note rate. Unlike A, this option will lower your ongoing monthly payment but you will still pay over the entire remaining term. You can do this with a Fannie or Freddie loan, in most cases, but not with an FHA or VA loan. You will need to check with your servicer to do it and there likely will be a modest one-time fee and an official document to execute.

 

[MSSANDRA]

We were in that VERY place just recently. My mom died and left us some money. We asked good questions and did a lot of looking at everything and then we paid off EVERYTHING we owed ,House included. It did not leave a huge about to play with afterwards. We did FIRST put full college fund money away. It really feels GREAT to not owe that huge payment each month. We are in this home however, forever. Built on family land and we have no intention to move so that was a big deciding factor.

BTW- the numbers did say invest but we are still glad we made the choice we did.

 

[libraryfreak]

OP here..I was thinking that 175000 at 7% (and it has earned more than 7%) would bring in around $12000/year and I would pay about 8000 in interest on my loan for one year-now to May 2012 (using the amortization calculator). That's 4000 cleared. The tax savings from our mortgage interest add about 1000 so I'm still ahead by about 3000.

I wasn't clear on if you calculated the extra taxes you will owe on the money you make? If not, then that would make your rate of return less than the 7%.

My vote is to pay off the house.

 

[bluedoggy]

A few months ago our DD passed away at the age of 32. She and her husband had life insurance (thankfully) After she died we sat down with DSiL and looked at their situation. We referred him to an excellent financial advisor. He was able to pay off all cc debt and medical bills, set aside funds for our DGrD college fund, and was advised it was better to invest the funds (wisely) than to take the bulk of it and pay off the mortgage. As the advisor said- if he paid off the mortgage- he'd have a free and clear house, but the money would be gone. This way- he is making money on the investments, he is back to work (she had been ill for over a year with leukemia and he had taken off work to care for her) so thankfully he is making enough to cover expenses and let the money work for him and his future.
Everybody's situation is different so do what is comfortable for you.
Life Insurance... you never appreciate it until you need it.

 

[CBoysMomLovesDisney]

OP here...
Thank you everyone for being so kind in your replies. It was so hard to lose my dad but he had dementia and had been really declining in the last 2 years. He'd really been suffering over the last 5 months (the last 3 especially). I'm so grateful that he's finally at peace and is able to be with my mom. They were married 53 years when she passed away in August 2008.

Back on topic...if we make a large payment on the house instead of paying it off, that won't change our monthly payment amount but just reduce the length of time we pay on our mortgage (substantially of course) so we wouldn't be able to contribute any extra to retirement.

We live pretty much paycheck to paycheck without a lot left over. This isn't as bad as it sounds. We live fairly frugally and put a lot in savings every month (about 20% of our take home pay because my husband only gets paid 9 months of the year-college professor-so we have to plan for three months with no paycheck), plus we put 10% in our retirement account (through DH's work/they match so we didn't want to reduce that amount obviously), we have a fully funded emergency account, a savings account for unexpected but not emergency expenses (like vet bills, car tires, etc) plus we tithe 10% of our income and have no CC debt. Just not a lot for "fun" money. I don't want to touch the investments for our summer living expenses, but we'd need to save less each month during the school year to cover summer if we didn't have to make a house payment.

The more I think about it, the better paying off the mortgage sounds. It would be VERY nice not to have a house payment, invest say 2/3 of the house payment for retirement, and have that other 1/3 to ease the tightness of our budget. My DH is in his mid 40's so he hopefully has a lot of working years still ahead of him (and could work well into his 70's...loves what he does, not physically demanding, and by that time in his career it would not be as stressful to publish or perish). We have a 15 year old and a 4 year old. A bit of "fun" $$ while our children are young would be lovely.

Does that sound sensible or foolish? And thank you again for your replies...feel free to keep the conversation going and the ideas coming.

I am not a professional in finance, but my brothers best friend is. I meet with him and the way he recommended how to handle a situation like this was:

Leave the investment in the account it's at now earning the interest 7.0% (which is more than the interest you would be paying on the house loan 4.?%). You can set up the broker to make the mortgage payment directly from that account. This allows a few things to take place.

1. You will still have the money in the account for any real emergency or for something extra you want or need.

2. This will free up the $900? payment you make each month on the mortgage, that could be used for additional savings or other expences.

3. You could even pay extra each month to lower the number of years on the mortgage.

You will always know that if you really needed to you could pay the loan off. But why loose out on the extra interest you will earn.

 

[mrodgers]

First, it's not a question of investments vs. paying off the mortgage. It's a decision about whether you want the extra $175,000 of your investments in residential real estate or in some other form. Because by paying off your mortgage that's really what your doing; shifting money from other investments into residential real estate.

This is where I differ from your thoughts. I don't have residential real estate. I don't think of my home as an investment. It is my home. Without my home, I am homeless. I didn't buy a home for investment, I bought it as a place to live. Without it, I have no place to live. If I need to dispose of my home because I suddenly can not pay for it, I have no other alternative for a place to live since my mortgage including taxes and insurance is still less than a typical rental and only slightly more than renting a dump. If I can't afford my home, I can't afford rent either.

I would pay the house off without question. I'm not rich. It is my home, not a way of making money for me because it is real estate.

I cringe every time I read about the economy and people short selling or foreclosing on houses simply because "we owe more than it is worth." It is where you live. I could care less if my house was worth $10 now, it is my home, not an investment.

 

[Suz D]

A few months ago our DD passed away at the age of 32. She and her husband had life insurance (thankfully) After she died we sat down with DSiL and looked at their situation. We referred him to an excellent financial advisor.

I'm so sorry for your loss. Although you may have known that your daughter might lose her battle, I can't imagine ever being prepared for the loss of your child. Thank you for taking the time to post a response.

 

[greystapes]

Definitely get professional advice. Remember, if you pay off your house, your money is no longer liquid. By keeping your money in investments, you will have easier access to your funds in case of emergency, etc.
Jill in CO

SO true. I would rather invest the money in something that will grow in value rather than paying for a house. when you pay for the house you lose money by loss of investment capital and the loss of future investments. The trend after a regression is a upward curve of income due to investments. now is the time to buy because everything is at a low price.


As Quoted from my favorite author Robert Kiyosaki of "Rich dad, Poor dad"

The biggest liability you have is your house. An asset is described as something that earns money. Does a house earn money??? not unless its real estate and you let others rent the house your house becomes a Liability because you have to pay mortgage dues, association dues etc. If you invest it The dividends will pay for the house.

 

[LovableGluttons]

This is where I differ from your thoughts. I don't have residential real estate. I don't think of my home as an investment. It is my home. Without my home, I am homeless. I didn't buy a home for investment, I bought it as a place to live. Without it, I have no place to live. If I need to dispose of my home because I suddenly can not pay for it, I have no other alternative for a place to live since my mortgage including taxes and insurance is still less than a typical rental and only slightly more than renting a dump. If I can't afford my home, I can't afford rent either.

I would pay the house off without question. I'm not rich. It is my home, not a way of making money for me because it is real estate.

I cringe every time I read about the economy and people short selling or foreclosing on houses simply because "we owe more than it is worth." It is where you live. I could care less if my house was worth $10 now, it is my home, not an investment.

WOw!


I could have written this myself!

I just could never have a mortgage. I need to own my home free and clear. It is not an investment vehicle, it's my home, and I'm not going anywhere.


OP, I'd pay off your mortgage. Get debt free first, then make decisions on the rest.

 

[mrodgers]

One other thing about this real estate values tanking. Did the stock market not tank at the same time? I lost 50% of my 401k in the matter of 1 month. Now after 2+ years, it is finally back to the same level and that is with the contributions that I pay and my employer pays in as well.

So the statement that if something happens that you can't pay the mortgage you have the money invested that you can liquidate to pay it isn't exactly set in stone either. I'd rather have a place to live first before I was making money investing money.

 

[jedijill]

One other thing about this real estate values tanking. Did the stock market not tank at the same time? I lost 50% of my 401k in the matter of 1 month. Now after 2+ years, it is finally back to the same level and that is with the contributions that I pay and my employer pays in as well.

So the statement that if something happens that you can't pay the mortgage you have the money invested that you can liquidate to pay it isn't exactly set in stone either. I'd rather have a place to live first before I was making money investing money.

But what happens if you need to move? I took a new job in a new state as my job was about to be outsourced to India. I've been trying to sell for 3 years with no luck. My money is tied up in a home I cannot sell and I have to rent in my new location. I want to buy a new home here but cannot as my money is tied up in my house in Missouri.

Jill in CO

 

[timmac]

This is where I differ from your thoughts. I don't have residential real estate. I don't think of my home as an investment. It is my home. Without my home, I am homeless. I didn't buy a home for investment, I bought it as a place to live. Without it, I have no place to live. If I need to dispose of my home because I suddenly can not pay for it, I have no other alternative for a place to live since my mortgage including taxes and insurance is still less than a typical rental and only slightly more than renting a dump. If I can't afford my home, I can't afford rent either.

I would pay the house off without question. I'm not rich. It is my home, not a way of making money for me because it is real estate.

I cringe every time I read about the economy and people short selling or foreclosing on houses simply because "we owe more than it is worth." It is where you live. I could care less if my house was worth $10 now, it is my home, not an investment.

Though I'd still disagree about paying off the house, I can completely understand why some might take that approach, and I can't say it's a bad move, of course.

What I really like though, is that you're correctly pointing out that it's not a "real estate investment". It's incorrect to refer to a home in which one resides as a real estate investment. As you've also pointed out, it's your home, without it you'd be homeless, so it's not something you can really sell in hopes of a profit (well, you can, but then you'd have to buy a new place or start paying rent, the value of either which would have scaled by roughly the same amount over time).