What would you do with the money?

[MarkBarbieri]

Mortgage rates a really low. So are stock prices and bond prices. Times are very uncertain. Inflation or deflation could be coming our way.

Let's say that you had adequate savings for retirement, 6 months of expenses in your emergency fund, etc. You also owe $100,000 on your mortgage and you have $100,000 extra dollars saved. What would you do? Why?

 

[GeorgeG]

I would pay off the mortgage. Putting your money into your own home is probably the safest thing to do right now. The value of the home may go up and down, but you will always have a place to live. That's not a concept for those who only consider a house only as a means for profit every few years. My house will always have tremendous value as a home, even if the market value goes to nothing.

 

[DisneyMomOK]

How about an investment in rental property? Cash is king right now and opportunities are available in lots of areas.

 

[Rafiki Rafiki Rafiki]

Paying off the mortgage doesn't guarantee you'll always have your home, especially in Texas. Our property taxes are pretty high here!

I would diversify with the money. Pay off any consumer debt, invest in a few stocks from companies that are undervalued because of the current market, save some of the money in traditional IRAs, a child's college fund, or some sort of low-risk savings, donate part of the money to a worthy cause, and spend some as well!

 

[Colleen27]

I'd pay off my mortgage. With so much uncertainty in the employment markets in my area, no investment could be better than the peace of mind that comes with knowing that foreclosure isn't just a job loss away.

 

[Tink888]

Personally I'd pay off the house and then I'd probably take what I used to spend on the mortgage payment and invest half and save half.

Even with low mortgage rates, you're still paying all that interest over the life of the loan. Savings aren't really paying any real interest and the markets are so crazy right now. I have a feeling they will be like that for awhile. The house is a tangible asset that's yours once it's paid (assuming you pay your taxes) and provides security. To me it just seems like the least amount of risk in very uncertain times. JMO

 

[Cool-Beans]

Mortgage rates a really low. So are stock prices and bond prices. Times are very uncertain. Inflation or deflation could be coming our way.

Let's say that you had adequate savings for retirement, 6 months of expenses in your emergency fund, etc. You also owe $100,000 on your mortgage and you have $100,000 extra dollars saved. What would you do? Why?

First explain to me why I have saved 100K, but not paid the mortgage off.

I'm paying off the mortgage now. Before I get the extra money.

 

[BriarfoxinWA]

I'd keep the money in FDIC insured CD's. Yeah the rates aren't real great but you would have the ability to pay the mortgage off at any time. You also have some flexibility if there is some kind of emergency that you need the funds for.

 

[disykat]

None of the above. I would put half of it into prepaid college tuition plans for my two kids. Then I would put 1/4 into the mortgage, maximize my IRAs and then invest the rest in a higher risk stock. That way I would be putting 75% into something really safe and the rest would be divided between moderate risk and higher risk stock options.

 

[abdullahkurdi]

I would pay off the mortgage.

 

[Tuffcookie]

I'd keep the money in FDIC insured CD's. Yeah the rates aren't real great but you would have the ability to pay the mortgage off at any time. You also have some flexibility if there is some kind of emergency that you need the funds for.

Ditto, what briarfoxinWA said!

 

[PrincessKitty1]

I would buy a vacation cottage in the $200,000 range two hours from here, put $100,000 down and mortgage the rest over 15 years. I think real estate is a decent investment right now with the prices so low, and I'd have a fun place to go every weekend. When I retire in 15 years, both my houses would be paid off and I could sell one and travel the world!

 

[Master Mason]

your interest on your house is one of the few deductions available. I would most likely invest in a rental property

 

[JennaTX]

None of the above. I would put half of it into prepaid college tuition plans for my two kids. Then I would put 1/4 into the mortgage, maximize my IRAs and then invest the rest in a higher risk stock. That way I would be putting 75% into something really safe and the rest would be divided between moderate risk and higher risk stock options.

When you talk about the prepaid college tuition plans for your kids, do you mean those that are sponsored by your state?

I have some money for my two kids in those, and in this day and age I am wondering how safe those are?

If you have the money, I would say now is the time to invest in real estate, property right now is so low.

 

[PatsMom]

I'd invest in stocks. The market is at a real low point right now and its like buying on sale. No guarantees as the market can always go lower (theoretically it can go to zero). But I have faith in the capital markets and believe that recovery will come. GE at $15 looks like a real bargain to me but I think I would invest in diversified mutual funds rather than individual stocks. And I would include an international fund in the investment.

 

[golfgal]

I'd keep the money in FDIC insured CD's. Yeah the rates aren't real great but you would have the ability to pay the mortgage off at any time. You also have some flexibility if there is some kind of emergency that you need the funds for.

Then you would be losing money because the interest rates on the CD's don't keep up with inflation.

I would either buy an investment property or I would purchase a paid up whole life policy from a very good insurance company that is paying a good dividend rate on your money. You then have a safe place to harbor your money, access to that money tax free if needed and a good return on your investment down the road as the markets improve.

Paying off your mortgage only makes sense if you are paying a higher interest rate then you can get on your investment return in the long run. Say you have a 5% rate on your mortgage and your investment is earning 6.5%, it makes more sense to put the money into your investment but if your home interest rate is 8% and your investment is getting 6.5, then pay off the mortgage (actually I would refinance the remaining mortgage since rates are around 5% right now and shorten the pay back time).

 

[Carly_Roach]

I'd keep all of it in a liquid fund, planning ahead for when my or DH's job went away and keep making my payments on the mortgage while hoping for the best in the future.

Like someone else said, they can always take the house for property tax default and I'd hate to have lost a $100K windfall that could have fed us for years in the future.

 

[BriarfoxinWA]

Then you would be losing money because the interest rates on the CD's don't keep up with inflation.

I would either buy an investment property or I would purchase a paid up whole life policy from a very good insurance company that is paying a good dividend rate on your money. You then have a safe place to harbor your money, access to that money tax free if needed and a good return on your investment down the road as the markets improve.

Paying off your mortgage only makes sense if you are paying a higher interest rate then you can get on your investment return in the long run. Say you have a 5% rate on your mortgage and your investment is earning 6.5%, it makes more sense to put the money into your investment but if your home interest rate is 8% and your investment is getting 6.5, then pay off the mortgage (actually I would refinance the remaining mortgage since rates are around 5% right now and shorten the pay back time).

On the mortgage you also need to figure in that they probably need that interest tax deduction. You make some good points but if they can refinance at a rate that is equal or even near what they are earning on their CD or secure investment and take advantage of the tax deduction for mortgage interest they may be money ahead.

I personally don't agree with buying real estate right now. But then I'm a conservative investor. Not sure that I would want to ride it out for another several years before I could get my money back.

 

[Chicago526]

In this senario, I'd bump my emergency fund up from six months to twelve, and invest the rest in both stocks and bonds (you didn't have that option, so I just voted "stocks"). Stocks are cheap right now, and at my age I've got time for the market to recover. With money in the bank and a low mortgage, I'd feel comfortable investing in riskier things like stocks.

 

[MarkBarbieri]

My personal situation reasonably approximates the scenario that I described in the original posting. I'm trying to decide what to do.

I won't invest in real estate (other than my primary residence) because it is too illiquid and more work than I want. I also don't see any large bargains around here. Our home prices have not fallen significantly, nor have they ever risen very quickly.

My current home loan is a 4.5% 5/1 ARM that will start floating in the spring of 2010. I'm debating whether I should pay it off or whether I should refinance it. If I refinance, I'm debating whether I should refinance the same amount (about 1/4 the home value), more, or less.

I looked at saving the money in safe investments, but the numbers don't work well. They would be useful for extending my emergency fund, but I'm already pretty comfortable with that. The problem with safe investments is that they pay so very little today. I'd rather just put the money into the house. It's true that I'd lose the interest deduction, but I would also avoid paying income tax on the interest income.

The real debate raging in my head is whether I should invest the money in the house (essentially earning a 5% return compared with borrowing) or whether I should invest the money. As low as the market is, I'm worried that I'm missing some great investing opportunities if I put the money in the house. Senior debts for very healthy corporations are yielding really, really well right now. Much better than 5%.

On the other hand, having the house paid for would be enormously satisfying from an emotional perspective. It is true that with about $800/month in taxes and HOA fees, I wouldn't be able to live without any fear of ever losing my house. Still, it's pretty comforting to know that it's paid for.

As for the college savings option that was mentioned, I'm already contributing to a 529 plan for each of my children and I adjust my contributions annually to make sure that I'll have enough money to send them to a top rated in-state public university (hopefully Texas A&M and not UT, but you never know with kids). I'm using a college savings plan and not a pre-paid tuition plan because I didn't think that the loss in flexibility (if the kids go to a private school or out-of-state school) was worth the benefits of pre-paid tuition.

In the end, I'll probably stick to my fairly conservative plan of paying down the house and maintaining an age adjusted balanced portfolio of US stock index funds, international stock index funds, bonds, and savings.

Thanks for your suggestions and comments. I have to admit that the small number of people advocating stocks and bonds has me really wondering if we are near a market bottom.