invest windfall or pay off mortgage?

[petroliapete]

HI - first time here. Thank you for having me.
I am about to receive a substantial and unexpected windfall and will have enough after taxes are calculated out to pay off all my outstanding debts and my mortgage. I will have about 20K left over which I will need to make some much needed repairs to my house.
My questsion is - do I invest the money or pay off the mortgage? details ar as follows:
age: 46
income 75K - pretty secure job
mortage payoff - $108,000
Property assesssed value 150,000
interest rate 5.75
credit score - not sure, some late past 90 day payments a couple of years ago, no defaults.
will need a new car in the coming year (I am pushin 250,000 miles on mine )
Married with one 7 year old boy

That is all I could think of.

any help you could offer would be greatly appreciated.
Thank you very much.

[disneysteve]

Welcome.

Do you have an emergency fund? If not, use some of the windfall to establish one of a minimum of 3 months worth of expenses.
Also set aside enough cash to buy a decent car - perhaps 10K. It makes no sense to pay off the house and then have to take out a loan to buy the car.
What does your retirement savings picture look like? Will you fully fund a Roth this year? Will your spouse also fully fund a Roth this year? If not, set aside money for that - $5,000 each.
Have you considered refinancing the mortgage? You can probably get a rate under 4% today. Either that or after doing the other things I mentioned, put the rest toward the mortgage and you'll have it paid off much sooner.

[bjl584]

Do you have any investments currently? Do you have an Emergency Fund? Are you currently saving for retirement? If so, how much?

It looks like you are going to need part of that $20K for a car soon. As for the rest, it depends on your answers to the above questions.

[petroliapete]

Thanks for your responses!
I do not really have an emergency fund - good point
Currently I am putting a little into retirement savings plan at work (about 250.00 month with a match and have about $100.00 I could contribute to maximize the match) though I am wayyyyy behind in retirement savings due to some rough years. have about 50k in a 401k.
If I pay off morgage can put more toward retirement. if not probably can add another 200/month after other debts are paid off.
Could lump 10k from the windfall into a roth IRA and have enough for a decent car.
Paying down and refinance the balance may be a good idea if can get 4%. Thanks for that advice I hadn't quite thought of paying down as much as i can and refince the rest.

I just keep wondering if there isn't an oppportunity where I would make more by investing to have retunrs that would more than offset the interest expense I pay on the mortgage. (this is the part where I only ever see updsides and I need an impartial third parties to bring me back to earth with reality )
Pleeeeease set me straight!!

Thank you very much Steve and Brian for all your insight. I really really appreciate it.

[bjl584]

I don't know what other debts you have besides your mortgage, so without knowing I would:

Refi the mortgage if possible.
Set aside 8K for a replacement car
Set aside the rest for an Emergency Fund

Now you can take the increased cash flow from the refi and start beefing up the retirement accounts. A Roth IRA would be a good idea as a compliment to your 401K.

[GREENBACK]

I personally would refinance if possible to get a low rate and just continue to make monthly payments toward the mortgage. I would invest heavily towards your retirement as I presume you still have quite a few working years left. Why not pay off the house? If you can refi. @ 4% but get 8% return on investments over time and preserve liquidity by not tying it up in the house you come out ahead in the end. Remember, you can always pay off the house if you like. Just something to consider.

I would definitely make sure you have the EF and other important things in place first.

[artwest]

Here's what I would do.

Set aside $20,000 for an Emergency Fund.

Set aside about $10,000 for a decent used car.

Pay off all debt except for the mortgage.

Make necessary repairs to the house.

Take the remaining money, apply it to the mortgage and refinance the rest.

It looks to me like you may be able to pay off everything except about $30,000 of your mortgage. Refinancing a $30,000 mortgage for 15 years at 4% interest should give you around a $222.00 (P & I) mortgage payment. That should free up plenty of money in your monthly budget to start increase your investing.

[feh]

How good are you at budgeting? If you were to pay off the mortgage, would you reliably save/invest most/all of what was going toward the mortgage each month?

[jpg7n16]

OP - you stated your weakness was a small retirement account. Normally when people can't decide between two options they think are pretty equal, I just say "do half and half" However, in this case, I'd tilt it towards shoring up your weakness.

What would I suggest?

10-15k for new car
15k for EF
Pay off all non-mortgage debts

Then:
Use 1/3 of what's left over to pay down and refi the home.
Invest the other 2/3.


This will give you the feeling of true progress by eliminating all debts, and significantly lowering your mortgage payment - while saving a lot of interest through the refi. It will also beef up your main weakness in the plan. Open a brokerage account if this new money makes you earn too much, and then systematically max out your retirement accounts.

Make long term investment decisions, investing for your retirement with a risk tolerance you can stomach.

[JustBill]

Well here's two cents worth coming from this direction...

You state that you can retire all debts including mortgage with your windfall, I say do exactly that. Get back to zero and build monetary strength from there.

As king of your take-home, (remember you said you enjoy secure employment) you can build an EF and pile cash for a car quickly, and make up plenty of ground on the retirement savings trail. You won't find any better savings rate than the absence of the mortgage, at your current 5.75 - or even a refi 4%.

Squirrel away the remaining 20k as the beginning of an EF.

Remember, if there is no mortgage, there can be no foreclosure.

Welcome to the 250k mile car club, it's good in here.

[DebbieL]

Wow, that sounds like quite a windfall! If it were me I would kill that mortgage. I hate debt, generally. I don't have enough confidence in the market (or myself) to know I could beat a 5.75% return (which is basically what you are getting by retiring that debt). You will be able to accumulate a lot of money quickly after all your other debts are cleared, which you can invest for your future, save for your next car, etc. I would make sure to keep enough of the windfall to give you an emergency fund of a few months of expenses (remember you will be mortgage free so much less money will be required).

Sounds like you are in a great position. Good luck!

[paul_btam]

I'm also in favor of paying off debt, but I think I would pay off all debts besides the mortgage, create an emergency fund, fund two Roths for the year, and fix up the house.

Then maybe I would consider applying the remainder to the mortgage, maybe even refinancing it after to get a lower payment due to both the extremely low rates and the fact that the balance would be much lower.

[petroliapete]

Thanks for all of you great feedback!! I definitely have a beter idea how to proceed!! # one common advice is the emergency fund. That is hwre I always seem to fail I definintely will keep that mind as I finalize my plans.

Thanks again. Great advice, great advice, great advice!!!!