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Inherited money. Should I pay off mortgage or invest it?
Hello. I inherited $100K last year and it's been sitting in a high-yield savings account. This amount could pay off my mortgage, I pay 3.75% in interest. I'll admit, it's been comforting to see my savings earn interest but keeping the money in a savings account earning so little interest doesn't feel quite right. I'm 45, don't plan to move anytime in the near future, and have a stable career. Should I go ahead pay off my mortgage, invest it or keep it where it is? Thanks.
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How about this idea. Since you’re planning to stay in the house for a while, pay it off, then put all the money you would have paid towards the mortgage into investments.
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R
@Sunil157, that sounds reasonable. I’d also make sure you’re maxing out your 401k contributions.
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N
@Remo515, thanks! I'm not quite there, but will max this out.
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T
@Nicole912, If you pay off your mortgage you can free up the monthly housing cost to pay off other debt, ie. credit cards, auto loans, OR you could pay off all other debt and use the remaining money towards the mortgage. Remember mortgage interest can be written off, the others can't. It really depends on your financial situation as to what works for you best, maybe split it 50/50 if you are unsure. Crunch the numbers to see if it"s worth it to refinance, current 30 yr fixed rates are around 2.65 % right now. I would pay down as much debt with the money as you can and then use the saved money to invest/ max out your 401k as the other writer mentioned. Unless you can get a guaranteed return of more than 3.75% I would not invest in a savings account and rated are no way near that now. You do get a guaranteed savings rate of 3.75% by paying down the mortgage and even higher paying down credit card debt and car loans
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N
@Tim118, you guys are great! Based on all your feedback, I probably will do a combination of pay off and investing. Even though the thought of not having a mortgage is enticing, deep down I am a practical person. Great reminder about debt, I do have about $9K in car loans and will wipe that out. And RIGHT about writing off mortgage interest. I'm looking into refinancing with my current bank and it looks to be around 3% at this point.
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J
If having the money gives you comfort, why rush it? You can take some time, another year or two to think through options? It may also be good to find a financial adviser who would be able to walk through the numbers and options for you.
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@Jazmin720, good idea. I'd also find a financial advisor you can learn from and grow your investments with. They can probably help you figure out what amount you can put towards the mortgage and what amount in investing and savings to minimize taxes based on your tax bracket since you’re paying taxes on the interest you’re earning in the savings account.
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J
If it were me, I'd invest it. I would think 3.75% is relatively easy to beat on an annual basis as long as you're investing for 15-20 years. But you may not be comfortable with that. Paying off your home isn't a bad idea though, and if gives you peace of mind, that’s a pretty big plus.
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N
Thanks to you all, some great sound advice here. I'm glad to see support for both options. Either way it appears I should consider a financial advisor!
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1. Don't think of money based on where it comes from (inheritance) and where it goes ("to home equity, or not to home equity, that is the question..." - NOT). A dollar in your inheritance high yield account is worth the same as a dollar in mortgage debt. 2. Think "return on investment" vs "cost of funds". 3. The return on investment in the high yield account is less than the cost of funds interest rate on the mortgage, so in a vacuum with nothing else to consider: payoff the mortgage. 4. But if you're human, you don't live in a vacuum, so first ask yourself "what do I want to do with my life" and then plan your financial decisions to support your goals. 5. What you should always love about FDIC bank deposits is they don't go down in value like investments will from time to time & your deposit is insured up to various limits ($100k no prob). 6. INVESTING is not what you do with some of your money for short periods of time, it's for most of your money for a long period of time.
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N
@Angus, thank you, that's a superb way of thinking about it! It's basically a framework I can apply to almost all of my money questions... really. I'll admit, it's been comforting to see the account growing, but since posting this and seeing all your responses, the idea of being free of mortgage is not just comforting but freeing! I will likely choose that path but will sit on it for another week and think further about goals and what I want to do with my life!
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@Nicole912, money in the bank is awesome if you, say, lose your job. Paying off your mortgage, than losing your job (pandemic! the economy has shrunk...) is a bad time to be "house rich and cash poor". The choice is not binary....good or bad, but better or worse? Remember the cost of funds vs return on investment decision? Your cost of funds (mortgage) may be higher than a safe high yield banking account, but probably not higher than a stock mutual fund will return over the next 30 years. Before you plop it all down on the mortgage, go look up what your interest rate would be if you refinanced now (maybe you've done that recently) at historic low rates, than go look up what the average stock mutual fund produces in annualized total return. Perhaps there is good reason to have money in the bank AND stock mutual funds AND a mortgage AND some but not necessarily complete home equity?
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N
@Angus, yes like an optimal mix, which makes sense. You read my mind about refinancing rates. I'm going to look into that straight away and keep you all updated. Thank you!
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@Nicole912 there is a lot of great advice here and you seem to be headed in a good direction in your thinking. As another member mentioned earlier, you have the ability to right-off mortgage interest therefore making the effective rate even lower than what you are borrowing on your mortgage. Also, as comforting as it is knowing you have no mortgage, by paying it down, you are tying up resources in your home, making it not very liquid should you need money for any unforeseen circumstances. Paying down/off any high interest rate debts would be prudent as there is zero appreciation on those debts, unlike your home. An emergency fund of at least 3-months should be something to consider having as well. Once you have the emergency fund and high interest debt taken care of, perhaps consider splitting your remaining capital across a high yield, lower risk investment portfolio. Compounding interest is the single greatest mathematical equation and you can’t get back time. Cheers!
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N
@Patrick818 Thanks! Doing just that. Planning to pay off a car loan, save a tad more, refi to a lower rate as I've gotten some new offers with lower rates, and invest some as well. Amen to compounding interest, you're right on the money about that!
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