Q: I've never understood the advantages and disadvantages of having a mortgage. On one hand, having a mortgage helped me buy my house and to have a much nicer house than if I had to pay cash. And, I get to deduct the interest. On the other hand, I have to make a mortgage payment every month. I just inherited $75,000. Should I use it to pay down my mortgage or should I invest it for my retirement?
A: You are in an enviable position because you have several options of what to do with that money. First, you could take a great vacation or make home improvements. You didn't mention those possibilities so we will only compare the advantages and disadvantages of paying your mortgage or investing for the future.
First, I'm going to assume that you have no other debt because paying interest on credit card debt is usually not to your advantage. Second I'm going to assume that you are an adult, probably a mature adult, with retirement in your future in the next 10 or 15 years but still employed. You can imagine that posing this question to a young person would raise many different considerations, especially given the power of compound interest and expenses of child rearing/education that young adults usually incur.
For you, the big unknown and something only you can decide is how much risk you like to tolerate. There is a nice sense of security in paying off a mortgage but it only makes financial sense to do so if you would save more in interest than you would earn by investing. If you are at the end of you mortgage payments, most of the payment is principal, so your savings is less.
If your employer has a 401(K) or similar program, especially if there is a matching component, it may make more sense to invest if there is no program, your next decision involves choosing the right type of investment. Low interest rates on Money Market accounts or Certificates of Deposit may swing your decision in the other direction and make paying off the mortgage more attractive. Investments in the stock market are another option, although certainly a riskier one.
An investment counselor could help you choose a diversified portfolio that would minimize the risk.
Before you make a final decision to pay or not pay off your mortgage, be sure your financial house is in order. Do you have a few months living expenses in reserve for an emergency? Do you have sufficient insurance? Do you have the right mortgage or is your old rate higher than current rates?
Perhaps refinancing should be considered also.
Have you considered spreading your $75,000 between debt retirement and investing? You would want to explore all your options fully with your tax advisor and investment counselor.
Questions about your mortgage can be answered by a mortgage attorney. You are in an enviable position and I'm sure you will choose well.
Attorney Sylvia Heldreth is a Certified Specialist in Real Estate Law. Her office is located at 1215 Miramar Street in Cape Coral.
This article is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.