Pay off the house... good idea

[daddiorick]

I am 57 wife is 59. She retired this year. I hope to retire at age 62. I am coming into an inheritance of about $80k next month. The balance on my 1997 built home is about $85k. I could easily pay off the house with the inheritance plus some savings. Current mortgage is 15 year at 3.6apr. I just bought the house this past May. Would appraise today at about $165K. It seems to me putting the inheritance in the house and investing the monthly saving of no house payment plus the savings on mortgage interest would create a significant chunk of change by age 62/63. By my calculations investing the $700/month savings from no house payment plus the interest savings would generate about $50K by age 62 and the "principal would still be wrapped up in the house and could be recouped by selling and down-sizing...

Whatcha all think? Thanks in advance...

[scubatim84]

I am 57 wife is 59. She retired this year. I hope to retire at age 62. I am coming into an inheritance of about $80k next month. The balance on my 1997 built home is about $85k. I could easily pay off the house with the inheritance plus some savings. Current mortgage is 15 year at 3.6apr. I just bought the house this past May. Would appraise today at about $165K. It seems to me putting the inheritance in the house and investing the monthly saving of no house payment plus the savings on mortgage interest would create a significant chunk of change by age 62/63. By my calculations investing the $700/month savings from no house payment plus the interest savings would generate about $50K by age 62 and the "principal would still be wrapped up in the house and could be recouped by selling and down-sizing...

Whatcha all think? Thanks in advance...

Well, it's not a bad idea, but consider this. Your interest rate is only 3.60% and a typical investment portfolio will return 6-8%. Also, a fixed loan payment devalues over time due to inflation and the mortgage interest is a tax deduction. If you pay off the house, you're putting $85,000 up front and then starting off investments at $700 per month. A better way of doing it may be investing all of the $80,000, since even just the dividend interest from that principal would pay a good chunk of your annual mortgage payments. Still, a 5-year investment horizon is not that long and having a paid off house is a great way to start your retirement. I think either way you can't go wrong. I would definitely talk to a CPA before you take the inheritance though, so as to work it in a way that minimizes your tax burden from the inheritance as much as possible.

[kv968]

What do your retirement accounts look like?

[bjl584]

I am 57 wife is 59. She retired this year. I hope to retire at age 62. I am coming into an inheritance of about $80k next month. The balance on my 1997 built home is about $85k. I could easily pay off the house with the inheritance plus some savings. Current mortgage is 15 year at 3.6apr. I just bought the house this past May. Would appraise today at about $165K. It seems to me putting the inheritance in the house and investing the monthly saving of no house payment plus the savings on mortgage interest would create a significant chunk of change by age 62/63. By my calculations investing the $700/month savings from no house payment plus the interest savings would generate about $50K by age 62 and the "principal would still be wrapped up in the house and could be recouped by selling and down-sizing...

Whatcha all think? Thanks in advance...

We need more info. What do your assets look like? Balance of 401K, Roths, Taxable accounts, cash?

[Christian321]

Well, it's not a bad idea, but consider this. Your interest rate is only 3.60% and a typical investment portfolio will return 6-8%. Also, a fixed loan payment devalues over time due to inflation and the mortgage interest is a tax deduction. If you pay off the house, you're putting $85,000 up front and then starting off investments at $700 per month. A better way of doing it may be investing all of the $80,000, since even just the dividend interest from that principal would pay a good chunk of your annual mortgage payments. Still, a 5-year investment horizon is not that long and having a paid off house is a great way to start your retirement. I think either way you can't go wrong. I would definitely talk to a CPA before you take the inheritance though, so as to work it in a way that minimizes your tax burden from the inheritance as much as possible.

What if the market goes down and he loses money? The way I see it:

Pay off home - then invest savings from no mortgage - if these investments take a hit in the marekt, it won't be a big deal since your home is paid off

or

Don't pay off the home - invest the $80,000 - if these investmensts take a hit in the market, it will be a BIGGER deal because you still have a mortgage.

Yes, we do need more info to give our best advice, but if you are like me and refuse to rely on a market return to secure your financial future, pay off your home and sleep better at night.

[EEinNJ]

I didn't see anything about the amount of interest being paid every month or the remaining time on the mortgage. If you pay off the house, annualize this and it's your guaranteed return on your 85K investment. To make up for the mortgage interest tax deduction, just contribute that much more to your 401k/IRA. This way, you'll be investing more, as well. It's a win-win safe bet.

[LivingAlmostLarge]

How much do you have saved for retirement and taxable accounts? I think paying off the home CAN be a good idea, but first off why did you get a mortgage just a few years ago?

Did you take out a mortgage to pay off a ton of credit card debt? Then perhaps it's better you stick with a mortgage payment and just stash the inheritance away so you don't spend it. Perhaps you have to modify behavior personally before you take a shortcut and pay off the mortgage.

It's not worth paying off the mortgage to take in out in another 2 years.

[scubatim84]

What if the market goes down and he loses money? The way I see it:

Pay off home - then invest savings from no mortgage - if these investments take a hit in the marekt, it won't be a big deal since your home is paid off

or

Don't pay off the home - invest the $80,000 - if these investmensts take a hit in the market, it will be a BIGGER deal because you still have a mortgage.

Yes, we do need more info to give our best advice, but if you are like me and refuse to rely on a market return to secure your financial future, pay off your home and sleep better at night.

Christian, that is certainly a risk but most everything in life worth doing has risks. This is why I said the OP could go either way and probably be fine. Still, note that he mentioned his APR is 3.60%...even if the markets do terrible, it's pretty unlikely they're not going to give you an average return of at least 4% which would put you better off than paying off the interest given that the rate is so low.


If risk-tolerance is a big concern to the OP, I probably would lean towards paying the house off early. As was previously mentioned, you can't place a value on living stress free and having no house payment is one way to accomplish that quite nicely. The thing is most people probably won't make a very good investment return simply because they keep moving investments based on how the market does each day, week, etc.

[dawnwes]

I would pay off the house myself.

[mrpaseo]

I paid off my house last January (2011) at the age of 38. The feeling of having the house paid in full is amazing. I paid it off in preparation for retirement from the Army (Age 39) and not knowing if I would be able to secure a job upon exiting (I found a job BTW).

If you pay off your house, you will feel good every day.

If you invest the money, you will worry every day if you made the right choice, especially if the amount goes down... even by a little.

Your choice, but I would pay off the house.

Ray

[amarowsky]

Well, it's not a bad idea, but consider this. Your interest rate is only 3.60% and a typical investment portfolio will return 6-8%. Also, a fixed loan payment devalues over time due to inflation and the mortgage interest is a tax deduction.

I agree. BUT If you have PMI (mortgage insurance on the house) which if you bought last year I'm pretty sure you do. I'd pay the 25% of the house off or have that appraisal shown to your lender so you can drop the PMI. My house is cheaper than yours slightly and it would save me $750 a year and then lower your overall monthly mortgage.

With your new lower payment you could save more, plus right now is a very low though slightly unstable market. Lots of chances to buy at rare low price for solid gains. But @ your age I'd prolly go for something a little safer and more conservative.

Basically I agree, I wouldn't pay off in full just enough to drop PMI and overall payment.

[scubatim84]

I agree. BUT If you have PMI (mortgage insurance on the house) which if you bought last year I'm pretty sure you do. I'd pay the 25% of the house off or have that appraisal shown to your lender so you can drop the PMI. My house is cheaper than yours slightly and it would save me $750 a year and then lower your overall monthly mortgage.

With your new lower payment you could save more, plus right now is a very low though slightly unstable market. Lots of chances to buy at rare low price for solid gains. But @ your age I'd prolly go for something a little safer and more conservative.

Basically I agree, I wouldn't pay off in full just enough to drop PMI and overall payment.

Excellent idea Amarowsky! I agree that, if the OP did want to invest the money, he likely would be better off if he did that to eliminate the PMI payment. This will reduce the monthly payment and help make the payment itself more affordable while still having money to invest.

[Petunia 100]

I would definitely talk to a CPA before you take the inheritance though, so as to work it in a way that minimizes your tax burden from the inheritance as much as possible.

If any estate taxes are due, they are paid directly from the estate before funds are distributed to heirs. What the heirs receive is already net of tax.

I agree with those who think more information is needed. If there are no other retirement savings, in my opinion the inheritance should be invested in a reasonable mix of index stock and bond funds. If there are plenty of other retirement savings, then go ahead and pay off the mortgage.

[moneybags]

If any estate taxes are due, they are paid directly from the estate before funds are distributed to heirs. What the heirs receive is already net of tax.

If money is inherited from a 401K or IRA, it is taxed when the person who inherits it withdraws the money. There are different options for withdrawal, but the money will be taxable to the recipient.

[TheMom]

I agree. BUT If you have PMI (mortgage insurance on the house) which if you bought last year I'm pretty sure you do. I'd pay the 25% of the house off or have that appraisal shown to your lender so you can drop the PMI. My house is cheaper than yours slightly and it would save me $750 a year and then lower your overall monthly mortgage.

With your new lower payment you could save more, plus right now is a very low though slightly unstable market. Lots of chances to buy at rare low price for solid gains. But @ your age I'd prolly go for something a little safer and more conservative.

Basically I agree, I wouldn't pay off in full just enough to drop PMI and overall payment.

He bought in May and it's worth $165k with a loan of $85k. Why would he have PMI with a 50% equity just because he bought within the last year? It's been a long time since I had PMI, but I thought it was for those with less than 20% equity. Has it changed?