Pay off house or invest

**jIM_Ohio** · 07-01-2010, 05:24 PM

Originally posted by TheStreetCeo View Post

I often thought about what I would do if I received a large inheritance or won the lottery or came across some huge chunk of money. So hypethically speaking I'd like to know your thoughts.

Situation:

Your 35 years old, your family (wife and two young children) has zero debt but your home. The house is worth $275k and you owe $225k. You have an 8 month emergency fund, small discretionary account, and very little retirement put away.
You recieve $500k in inheritance money (no taxes need to be paid).

What would you do with it? Pay off your house and stick the rest in your retirement account?

Paying off debts makes sense in some cases with an unexpected lump sum, however because retirement accounts are next to nothing, I would possibly suggest otherwise depending on expenses and how money is handled post windfall.

**mrbraly** · 07-01-2010, 06:26 PM

I would pay the house off right away if I received a lump sum. Assuming you have been wise with you resources and already have at least some investments, paying the house off would be the route. After the house is paid off, that frees up a massive amount of cash flow and considering you are only 35, you can take the amount paid on the mortgage every month and throw that into misc. investments.

**disneysteve** · 07-01-2010, 06:36 PM

I'd say it depends on the interest rate on the mortgage. If you have a super low rate, which is common today, I'd probably keep the mortgage and invest the money. Actually, I'd probably do a little of both by adding a few hundred or a thousand each month to the mortgage payment and invest the rest.

**jIM_Ohio** · 07-01-2010, 06:43 PM

Originally posted by mrbraly View Post

I would pay the house off right away if I received a lump sum. Assuming you have been wise with you resources and already have at least some investments, paying the house off would be the route. After the house is paid off, that frees up a massive amount of cash flow and considering you are only 35, you can take the amount paid on the mortgage every month and throw that into misc. investments.

right, the big "if" is the investment balance, which in this hypothetical- does not exist.
the other semi big "if" is the assumption the entire mortgage payment is invested once its paid off... if the mortgage payment is spent, the OP is best off investing and continuing to pay on a mortgage.

**jpg7n16** · 07-01-2010, 09:46 PM

I go in this order:

If the interest rate on the home is over 7%, I likely pay it all off. If less than 7% go to #2.
Max non-401k retirement account contributions for the year (10k)
Fund 529 plans for the kids
If house is between 5-7%, I pay off half; if less than 5% I pay off nothing
Lower my EF, cause 8 months is way too high (6 mos. max in cash)
Depending on whose family member it was, buy my wife/self something nice to help ease the situation
Invest whatever remains after doing all of the above

**zhuwh** · 07-02-2010, 01:45 AM

Can i ask a "stupid question" because i am a poor.Where could he invest the money?

**disneysteve** · 07-02-2010, 05:05 AM

Originally posted by jpg7n16 View Post

I go in this order:

If the interest rate on the home is over 7%, I likely pay it all off. If less than 7% go to #2.

If the home loan is over 7%, I'd refinance. They have 50K in equity so that shouldn't be a problem.

Originally posted by zhuwh View Post

Can i ask a "stupid question" because i am a poor.Where could he invest the money?

Anywhere he wants - stocks, bonds, mutual funds, ETFs, real estate, commodities, whatever floats his boat.

**maat55** · 07-02-2010, 10:51 AM

I would payoff the house and invest the rest. I would also invest the former mortgage funds. Somewhere in this plan I would take a vacation.

**disneysteve** · 07-02-2010, 10:57 AM

Keep in mind that you can't just stick money in a retirement fund. Roths are limited to $5,000/year and 401ks are limited to $16,500/year. Most of this money would need to be invested in non-retirement accounts.

**lovcom** · 07-02-2010, 11:27 AM

DisneySteve's advise is great. So long as one is not in a "Great Recession".

If one has a huge windfall, interest rates on investments, CD's etc be damned!

Pay off the mortgage for Pete's sake!

Better to live in a "free" house with little or no investments then to have a mortgage and gamble with investments.

The economy is in the toilet, and the outlook is bad. If you got the huge bucks, kill the mortgage, and all your consumer debt too (credit cards, car pmt, etc).

Then going forward, be a miser, a saver, stop using the credit cards, stop replacing perfectly good autos every other year. Save and in time you can start to think about investing, rental properties, etc....

**jpg7n16** · 07-02-2010, 12:05 PM

... and keep all your money in your mattress.

True investing is not gambling.

-Warren Buffett (http://www.nytimes.com/2008/10/17/op...17buffett.html)

I've been buying American stocks. Why? A simple rule: Be fearful when others are greedy, and be greedy when others are fearful.

...

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

**disneysteve** · 07-02-2010, 12:07 PM

Originally posted by lovcom View Post

The economy is in the toilet, and the outlook is bad.

Save and in time you can start to think about investing, rental properties, etc....

So what you are saying is don't invest now when prices are beaten down. Wait until they go back up and then put your money in the market. While that is how most people operate, I can't say that I agree. The time to make the most money is in the depths of the downturn. Buy when there is blood in the streets.

Just a different point of view to consider.

**MonkeyMama** · 07-02-2010, 12:10 PM

I'd probably pay off the mortgage and invest the rest. It ends up rather 50/50 which would be my two main goals. Reads very much like our own scenario, BUT for the "little in retirement" and "$500k windfall" thing.

I would want to know why so litte in retirement, I suppose. But, the point is you can't lump sum a large figure into retirement, so I think it could be prudent to pay off the house and direct the house payment into retirement. The rest iof the inheritance nto retirement, as allowed, and taxable accounts otherwise. Depends on other savings goals.

I lean towards mortgage because it is my next savings goal after retirement. My perspective is good job, "retired" spouse, savings goals on track. Mortgage makes sense. If I was less further along, I may not bother paying off the mortgage. If my job was less secure, not sure I'd pay off the mortgage, either.

**investnoob** · 07-04-2010, 06:56 AM

Originally posted by zhuwh View Post

Can i ask a "stupid question" because i am a poor.Where could he invest the money?

Hello Zhuwh. I recommend you check out the boglehead forums (google boglehead - I can't post links right now as I only have one post). Lots of information on investing.

You could also do some research by going to the library and checking out some of their recommend reading (you can see their recommended reading on the left hand side of their home page).

You could start with the Boglehead guide to investing, and the Boglehead guide to retirement. Both great books.

Once you have read a couple of them, post some questions on the forum for some advice. Everyone is very helpful over there.

Good luck.

Pay off house or invest