I recently received a significant windfall. Should I pay off my mortgage or invest it?

I recently received a significant windfall. Should I pay off my mortgage or invest it?
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#1

We now have enough money to pay off our mortgage completely and be debt-free. However, we’ve heard advice that it’s beneficial to keep a mortgage payment and that we should invest our money in stocks and bonds. Which is a better approach?


#2

Unfortunately, there is no cookie cutter answer here, and even so, it will depend on who ask. The best option is going to be to contact a CFP® professional who will be able to help you analyze every situation. Check out www.letsmakeaplan.org to find one near you.
The argument is that you are able to itemize your mortgage interest and that a mortgage is not really held against you as long as you are making payments regularly.
When you pay off the house your overall net worth is becoming highly concentrated in local real estate. As we’ve seen over the last few years, your success or loss in this arena can differ by just what zip code you are in, and there is no real way to predict your home’s future value.
By investing in a well diversified portfolio that is tailored to your own needs and risk tolerance you’ll be able to build net worth over a longer period of time and be exposed to less risk. A good thing to think about is to increase your monthly payment. If you have a 30 yr mortgage, try to pay it off in 15, all the while still being able to invest.
Hope this helps and good luck! -Stephen H.


#3

I’ve stated here before (https://www.nerdwallet.com/ask/question/what-are-the-advantages-of-paying-cash-for-a-house-vs-taking-out-a-mortgage-3090) that paying down (or off) your mortgage is like burying the money in your back yard. There is a zero percent rate of return on that cash.
Now, to be fair, there is a cost of not paying down the loan and that is the cost of the interest payments. I know this is a big bugaboo for some folks. People like Dave Ramsey and Suze Orman scare folks by talking about the huge amounts of interest that get paid over the life of a 30 year loan. On a $100,000 30-year loan at 4%, you will pay a total of $71,869.51 in interest costs … but, here’s the thing:
– Paying attention to the interest cost on a loan is ignoring the opportunity cost of what that money could be doing instead. Even in today’s crappy interest rate market, a well managed portfolio should (over the 30 year life of a mortgage) be able to get 6-7% in return.
If there was a way NOT to pay any of the principal on the loan and put those interest payments towards a side account and let that account grow at 6.5% … you’d have $273,717.30 at the end of the 30 year period - that’s a LOT more than the $71,869.51 that the interest and $100k principal payback is “costing” you.
Now you may have a shorter timeframe and that brings market timing risk into the question. As Stephen Hart suggests, you should work through the options with a financial professional - preferably one who can give you ALL your options and isn’t predisposed or conflicted (should be a fee-for-service adviser) - and yes, I like the CFP® professional route.
I know there is a huge emotional issue here and it may be best for your peace of mind to be rid of the burden of that mortgage (which should always be the last debt you dump). I get that. It’s just important to understand what that “peace of mind” is actually costing you. Somehow, to me, it’s worth having to write a check once a month for 30 years in order to have an extra $100k at the end of the period - that’s being paid $3 for each check you write.


I receuved a settlement. Should I pay off my mortgage?
#4

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