Lump sum of money - pay off house or invest?

[bicker]

Pay off all debt first.

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?

 

[mjkacmom]

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!

My DH is a CFP, and would agree with this, especially if the money is going towards retirement.

 

[Pea-n-Me]

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.

While I agree, I don't know that it's scary. It's just different strokes for different folks.

 

[Va-bear]

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

Ron.

 

[minkydog]

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.

That's what I would do. I came into a good bit of money several years ago. First I put it into a regular savings account until I could figure out what i wanted to do. Then I paid off all our cars and credit cards. I put a goodly sum into a 2-month family trip around the U.S. with our RV, seeing 12 National parks, Disneyland, and other stuff--well worth the money and we have awesome memories! I took what was left, still a large amount and funded my 401k, IRA,special needs trust for Christian, and invested the rest. I took a pretty hard hit during the big downturn in 2008 but I have recovered a large portion of that.

We opted not to pay off the house. We are within $50,000 of paying it off, about 3-1/2 years. Our interest rate is very low and at this point we are paying relatively little interest. What interest we do have is tax deductible and with our reduced income we get nearly all of it back.

 

[S. C.]

I would say it is up to her since it is HER inheritance.

 

[minkydog]

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?

This is a good point. We were sitting pretty 7-8 years ago, both of us with stable jobs, a nest egg,and manageable debt. Then my physically fit, vital DH got sick, really really sick at age 47. Because our income was reduced due to his illness we had to use up our savings and then we maxed out o.ur credit cards. We also have a severely handicapped son and I just couldn't work any more than I was working. Over the course of the last 6 years DH has become more and more disabled and now has not been able to work at all the last 3 years. THe plan that we so carefully laid to save up money for the next 20 years until retirement flew right out the window. It took us 2-1/2 years to get him on SSDI. If I had not inherited some money during that time we would have been on the street.

I guess what I'm saying is we don't know the future. The best laid plans can be overthrown in an instant. We live on DHs SSDI--definitely not the high life. I work a little but I don't make much, certainly not enough to support a family. I would never pay off my mortgage in lieu of putting away substantial savings. I thank God that my grandparents and my dad were able to leave me with a large enough endowment that we can have an emergency fund and some retirement, because I doubt we will be able to fund those things otherwise.

 

[KramBerries]

One consideration not mentioned is whether the money should kept separate rather than converted to community property. I have no idea how that concept works in Canada or even outside of Texas. Here, despite being a community property state, an inheritance is the sole property of the person that inherits it, unless the commingle it with community property. Paying off the house would probably count as commingling.

So why keep it separate? First, while almost everyone wants their marriage to last forever, the truth is that many don't. If you keep the property separate, you can share it like you both own it, but if something happens, you still control it. As a parent, I would be disappointed if my child loss half of the estate I passed on to him to an unfaithful spouse.

There are other benefits to keeping it separate as well. If your spouse is sued, it would be much harder for someone to take your money if you kept it separate.

Community property considerations aside, I think the next consideration should be liquidity. Everyone should have enough money in a safe, liquid source to tied them over difficult times. How much depends on how stable your employment is, your risk tolerance, etc.

After that, I think that they should save/invest the rest. They should consider the after-tax risk weighted return of various investment options. Investing in their house is very low risk (well, for most places in most time periods...not in, say California last year). On the other hand, with mortgage rates so low, it's also fairly low return.

One final consideration is their self control. Some people (seems like most people) have trouble not spending their money. For those people, it might be best to lock up the money in some place that won't tempt them. That might their house or a retirement plan. You can get the money out of either, but they are less tempting than having money sitting in a savings or brokerage account.

 

[KramBerries]

I suppose something should be said for the psychological advantage of living in a paid off house. We paid off ours last year and it absolutely thrilled my wife. She derives a surprising amount of pleasure from knowing that we don't owe anything else on the house. For me, having a $100,000 5% mortgage and $200,000 in a 5% bond isn't much different than having no mortgage and a $100,000 bond.

 

[Colleen27]

I'd absolutely pay off the mortgage. The security that comes from owning your residence outright is indescribable! Then they can invest the remainder along with the money they're currently paying each month on the mortgage to plan for their future.

 

[Melmac]

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.

We opted not to pay off the house. We are within $50,000 of paying it off, about 3-1/2 years. Our interest rate is very low and at this point we are paying relatively little interest. What interest we do have is tax deductible and with our reduced income we get nearly all of it back.

In Canada, you can only deduct your mortgage interest on your income tax if you make below a certain amount a year. I don't know what the exact number is but it is really low ($20,000-30,000/year total household income? Lower class to poverty level IIRC). If they make a decent wage, this is not an option. Just an FYI for our American neighbours

Edited to add ...
I would probably pay off the house and other debt, invest the $80000 (or use some for home improvements) and put what was being paid into the mortgage into an RRSP (which is tax deductible).

 

[testifyoncruises]

Absolutely pay off the mortgage, no questions about it. Putting the money they were paying on their mortgage into tax free retirement account will give them a far better return than one lump sum investment. You never ever want to put a lump sum into something as volatile as stocks.

 

[golfgal]

Absolutely pay off the mortgage, no questions about it. Putting the money they were paying on their mortgage into tax free retirement account will give them a far better return than one lump sum investment. You never ever want to put a lump sum into something as volatile as stocks.

Um, I think you (and Dave) need to read up on the time value of money and asset allocations .

 

[tiggspring]

I would pay off the house so they could never take that away. That is worth its weight in Gold. If the last year has tought us anything its own your home!

Then dollar cost average the rest along with new money freed from morgage into their investments. That way you limit the risk of putting it all in at once. The market is do for a decent dip when the fed has to raise rates from zero duing. He will have to do this to keep inflation down and the market will not like it. Would hate to have all the money in the day before that happens. I would max out any 401K with matching funds from imployer too.

 

[Minniemama350]

I'd absolutely pay off the mortgage. The security that comes from owning your residence outright is indescribable! Then they can invest the remainder along with the money they're currently paying each month on the mortgage to plan for their future.

Well said! Exactly what I meant

 

[KramBerries]

I would pay off the house so they could never take that away.

I suppose that depends on what you mean by they. If I don't pay my property taxes, they can take my house away. My taxes are as high as my mortgage payment was.

If I don't cut my lawn, my homeowners association will send someone to mow it. If they do that, they'll send me a bill. If I don't pay that, they can foreclose on my house.

In most states, there is a limit to how much home equity I can shelter in a house if I am forced to pay some debts. In that case, I'm back to only keeping my house for as long as I keep paying my mortgage.

If I don't pay my insurance, mother nature or a local arsonist can also take my house away from me.

Paying off your mortgage means that you don't have to keep paying your mortgage. It means that the bank cannot take your house away from you. It doesn't mean that no else can take it away.

 

[Tink888]

I'd pay off the house and invest the rest. Oh and I'd take a little and head down to Disney for two weeks.

 

[Mermaid02]

Go see a financial advisor and see what he/she says. Seriously, they shouldn't be fighting over this until they see what the advisor says. After they talk to him/her they will probably be on the same page.

 

[dcentity2000]

Pay off the house!

Then use the money they save to invest.



Rich::

 

[bumbershoot]

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

FWIW, I know that in my marriage, DH would agree that it's my money. I would try to tell him that an inheritance HE got was HIS money, but he has long held the notion that "Robert's money is Molly's money, and Molly's money is Molly's money". He started that while we were just engaged and hasn't backed down on it yet.

I suppose that depends on what you mean by they. If I don't pay my property taxes, they can take my house away. My taxes are as high as my mortgage payment was.

If I don't cut my lawn, my homeowners association will send someone to mow it. If they do that, they'll send me a bill. If I don't pay that, they can foreclose on my house.

In most states, there is a limit to how much home equity I can shelter in a house if I am forced to pay some debts. In that case, I'm back to only keeping my house for as long as I keep paying my mortgage.

If I don't pay my insurance, mother nature or a local arsonist can also take my house away from me.

Paying off your mortgage means that you don't have to keep paying your mortgage. It means that the bank cannot take your house away from you. It doesn't mean that no else can take it away.

Good point. Also, the gov't might decide a highway would be nice right on their property.



I would pay off debt, make sure I had an emergency fund, take a little bit for a vacation or whatever they love, and invest the rest for retirement.