Lump sum of money - pay off house or invest?

[Skywalker]

My friend and her husband both work and basically live paycheck to paycheck. They owe about $120,000 on their mortgage.

She just inherited $200,000. Great, right?

Now they disagree on what to do with it!

She would like to pay off the house and invest the remaining $80,000. Without a mortgage their income would obviously go much farther every month and they could do more, get ahead more, whatever.

He would like to just keep living right now like they never got the money, and use the entire $200,000 as an investment in their future/retirement/whatever. He feels they will need all they can get in their later years.

They are going to see some financial planning type of person Monday, I was just wondering what others would do?

I don't know what I'd do, but I think I'd be mulling it over with a cocktail on a cruise ship somewhere, lol.

 

[tileman]

Well I would pay off the house if it was my money & save the rest.

Ron.

 

[Minniemama350]

Pay off all debt first. Investing doesn't make sense when you owe that much. Paying debt eliminates the cost of the debt(interest). Investing may/may not yield a profit. If all debt is paid, you should be able to bank some cash that you can turn around and invest for the future.

 

[freckles and boo]

I tend to agree with the husband. I would put the vast majority of the money toward retirement but some would be easily accessible for emergencies. Unless they have an outrageous interest rate on their mortgage $120,000 is a manageable amount. You also don't mention their ages. That could change my opinion.

 

[WDWBarb]

There are many variables.

How old are they? How much do they have in a retirement account? Do they have their 6-8 month emergency fund? Do they have any other debt whatsoever? Do they have children, and, if so, do they have enough money in a college account?

First fund at least 8 months of an emergency fund. Make sure that it is liquid and in some sort of high-yield savings fund.

If they have other debt, pay it off first.

If they don't have enough in retirement, make that the next priority.

If money is needed for a college fund, put some there.

And finally, if they are living in the house that they expect to live in for the rest of their lives, they should pay if off. If not, keep the mortgage (and refinance if necessary to take advantage of lower interest rates) and invest the rest.

 

[Carly_Roach]

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

 

[abdmom]

OP, I notice that you are in Toronto. Are your friends also in Canada? Because that would make the advice soo much different than advice given to Americans. In the States, college expenses and retirement savings are a much greater worry than they are to Canadians. Having lost a huge amount in investments over the past year, I'd pay off the mortgage first, whichever country your friends live in.

 

[Skywalker]

I tend to agree with the husband. I would put the vast majority of the money toward retirement but some would be easily accessible for emergencies. Unless they have an outrageous interest rate on their mortgage $120,000 is a manageable amount. You also don't mention their ages. That could change my opinion.

They are in their early 40's.

There are many variables.

How old are they? How much do they have in a retirement account? Do they have their 6-8 month emergency fund? Do they have any other debt whatsoever? Do they have children, and, if so, do they have enough money in a college account?

First fund at least 8 months of an emergency fund. Make sure that it is liquid and in some sort of high-yield savings fund.

If they have other debt, pay it off first.

If they don't have enough in retirement, make that the next priority.

If money is needed for a college fund, put some there.

And finally, if they are living in the house that they expect to live in for the rest of their lives, they should pay if off. If not, keep the mortgage (and refinance if necessary to take advantage of lower interest rates) and invest the rest.

Okay I seriously don't know the answer to any of those questions, except that they are in their early 40's, lol.

 

[Skywalker]

OP, I notice that you are in Toronto. Are your friends also in Canada? Because that would make the advice soo much different than advice given to Americans. In the States, college expenses and retirement savings are a much greater worry than they are to Canadians. Having lost a huge amount in investments over the past year, I'd pay off the mortgage first, whichever country your friends live in.

Yes, they are in Canada too!

 

[abdmom]

Yes, they are in Canada too!

OK, then I would put some towards the mortgage and some in an RRSP, or pay off the mortgage and start putting x amount per month into an RRSP.

 

[LoraJ]

Don't know how it works in Canada, but will they have to pay taxes on that inheritance?

 

[Christine]

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

I agree.

 

[The Mystery Machine]

I would pay off half of the morgage & refin with a 10yr note.

Is the house fixed up or sellable? How much work needs to be addressed? If the house needs repair that would be my next stop.

Then I would look into investing.

 

[golfgal]

I am not familiar with Canadian tax laws, etc. but in the US what I would do is make sure my mortgage was at a low interest rate, right now they are in the 4.5% range around here. If I was over 5.5% I would refinance the mortgage, put 6-12 months income into a mutual fund with a conservative asset allocation, put the rest into a retirement account, ROTH IRA if they meet income guidelines probably.

To pay off a mortgage that is costing you 4.5% and not invest in something that will get you 8+% is silly.

 

[AlleyKat]

My friend and her husband both work and basically live paycheck to paycheck. They owe about $120,000 on their mortgage.

She just inherited $200,000. Great, right?

Now they disagree on what to do with it!

She would like to pay off the house and invest the remaining $80,000. Without a mortgage their income would obviously go much farther every month and they could do more, get ahead more, whatever.

He would like to just keep living right now like they never got the money, and use the entire $200,000 as an investment in their future/retirement/whatever. He feels they will need all they can get in their later years.

She inherited the money, it's hers to do with what she wishes!

Investing allows for too many negative variables. Her wishes seem to be the wisest!

 

[nmmom95]

It's hard to say without knowing their entire financial picture. Do they have credit card debt or a car loan? Do they have a very low interest rate on their mortgage? Seeing a financial planner who can tailor a plan to their particular situation is probably the best thing they can do.

 

[Pea-n-Me]

I'd consider an investment property in a super location and in good shape. Now is a great time to buy. Its sale later on can be used to fund retirement, college, etc. (No riskier IMO than some other investments, and they can enjoy it in the meantime.)

 

[VillageMama]

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

A-men!

She inherited the money, it's hers to do with what she wishes!

That's sure not how my marriage works! We are a partnership and we make all major decisions together.

 

[BCDisneyFanatic]

I'm going with the less popular opinion and recommending investing the money. I don't know about other people, but my 10-year return on my investments still has a higher rate of return than my interest rate on my mortgage (5%). It seems silly to pay off a manageable mortgage instead of investing that money and seeing greater returns.

The tax has already been paid on the inheritance money, and if I already had enough invested that I'd be paying as much in taxes at the back end as I would now, I'd leave the money outside of an RRSP (lots more flexibility that way on investing and using it if/when necessary). Alternately, if they are hurting for cash now (or would like some 'fun' money), they could each max out their RRSP contributions and get a really nice tax return this year (since they have until the end of Feb to contribute for 2009).

Since the couple is in their 40s, investing the money now would likely mean they could choose to retire within the next 10-15 years. I think I'd be willing to put off a bit of fun now when the payoff is so close in sight!

 

[wdwfan16]

It would depend what they would do with the mortgage payment. If they are diciplined to invest that and not just piss it away then I would pay off the house. If they are not diciplined then I would invest the entire amount and keep doing what they are doing.

Since it is her money she could invest it in just her name to protect it in a future divorce.