Pay off the house... good idea

[Petunia 100]

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.

Of course. 401k and IRA monies are not part of the estate. But you are right, the OP didn't specify the inheritance is from settlement of the estate, OP simply said "inheritance", which could mean "inherited IRA".

[Petunia 100]

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?

No, that has not changed.

[amarowsky]

Your pmi remains on the loan until 25% is paid on paper . Then it auto drops along with the payment . If you inform your lender by submitting that you have at least 20% of the equity paid by either a change in value from appraisal or other appreciation. Basically the 5% difference you have to let them know early.This was according to my buddy who's a newer loan officer.

[scubatim84]

Your pmi remains on the loan until 25% is paid on paper . Then it auto drops along with the payment . If you inform your lender by submitting that you have at least 20% of the equity paid by either a change in value from appraisal or other appreciation. Basically the 5% difference you have to let them know early.This was according to my buddy who's a newer loan officer.

From what I understand, once you have paid 20% of your principal off you can request to have the PMI removed from your loan but this is dependent on your financial institution. My credit union automatically removes the PMI...many banks will leave it on there until you demand that they remove it. As you can imagine, big banks don't have the most honest business model, and I wouldn't assume that it will drop off automatically unless you have that in writing. Everyone should do their own homework for their loan and make sure the PMI is not on there one month longer than it should be.

[LMA]

Mathematically speaking you are better off to put that money to work somewhere else rather than paying off the house. The ROI you get on home equity is pretty poor.

However, it also depends on how you sleep better at night. How would it make you fell to have a home paid off? Are you staying in that house for good? Is there a chance you might not be around at some point and might want to leave the wife secure with a paid for home?

All of those things need to be considered in order to make the decision. My vote would be to invest that money somewhere rather than paying off the mortgage and make it grow. If you ever needed to pay off the home for some reason then the money would be there anyway.

[LivingAlmostLarge]

I am still a dissenting voice here saying don't pay off the house.

I want to know why are your age you have a mortgage? What's the backstory? Did you buy a new home and not have enough equity? Did you refinance to pull out to pay credit cards?

I think it's important more than just paying off debt to understand why you have a new mortgage at your age before just dumping something as "one time" as inheritance towards debt.

It doesn't change behavior or relationship with money. You could end up in the same situation in 5 years without an inheritance to bail you out.

[ecoadapt]

I think it's not a bad idea,but you really have to weigh things up.

[chrisburke21]

Re:Pay off the house

The advice to funnel the additional inheritance into your investment accounts is sound financial advice. What a lot of people do not consider with their personal finance decisions are how comfortable they are with debt and risk. You need to take into account these two factors to make a decision that you are comfortable with. I would say mathematically it always makes sense to invest the money instead of paying off the mortgage.

Chris

[EEinNJ]

The advice to funnel the additional inheritance into your investment accounts is sound financial advice. What a lot of people do not consider with their personal finance decisions are how comfortable they are with debt and risk. You need to take into account these two factors to make a decision that you are comfortable with. I would say mathematically it always makes sense to invest the money instead of paying off the mortgage.

Chris

Incorrect. This assumes that however the money is invested, it will produce a guaranteed rate of return greater than the interest being paid on the mortgage. And, it will do so right away, without any risk. Lots of people would love to know about such an investment!

[scubatim84]

Incorrect. This assumes that however the money is invested, it will produce a guaranteed rate of return greater than the interest being paid on the mortgage. And, it will do so right away, without any risk. Lots of people would love to know about such an investment!

Great point. However, if you invest in a reasonably priced index fund which tracks the whole market, well the entire stock market has returned somewhere in the neighborhood of 10-11% nominally since 1929 through 2009. Throw some bonds in there and it's fair to say you will get about 8% each year on average with a long investing horizon.

The mistaken assumption here is that paying off the house is a guaranteed saving. What about inflation? If we see a lot of inflation in the next few years, which wouldn't shock me given what the Fed is doing, that loan would become cheaper relative to everything else since stocks, earnings, etc. tend to keep up with inflation for the most part. One could argue that this would be a loss in a sense, since the loan would be devalued, and paying it off later would have been cheaper.

Either way it really boils down to both options being good ones. There's no certainty in life...the moment we try to convince ourselves there is, that's about when life is going to bite you in the ass.

[daddiorick]

My apologies for going AWOL on this one. The responses are oh so helpful! Thanks so much! Here is more info. Current retirement investments in various forms (but no Roths) add up to about $250K. The mortgage is a 15 yr fixed at 3.25%. Just bought the house in April so have only paid 2 months so far. The 240K is well diversified with bulk in a fixed option with 403B at 3.5%. Yes I am conservative by nature and do not feel any need to expose more market risk.

[daddiorick]

Oh and there is no deep dark back story. New house came with new job (with salary bump) and move from Colorado to East Coast. House in Colorado sold in 48 hours to a cash buyer. Imagine that! So it was simply a life change kind of thing that we did not see coming but certainly view now as a huge blessing. I just had no idea Mom would pass as well and the inheritance could have made me a cash buyer here if I had waited two more months to buy. Having read everything, the sleeping at night as well as wife's security are big with me. I am listening but leaning towards paying off the mortgage... BTW, obviously no PMI. :-) No credit card debt or car payments and I have about $40k in cash for safety net stuff...

[kv968]

It seems as if you could go either way and be ok. IMO, I'd do a little of both.

First of all, I'm not sure if you have enough in retirement savings so I'd personally want to boost that a bit. If you have $250k now and you're planning on retiring in 5 years, that would give you ~$367k (assuming no more contributions and an 8%/yr return which I think is a bit generous). Since none of it is in a Roth and is all subject to taxes, using the "rule of thumb" 4% withdrawl rule, that'll give you $14,700/yr and about $12,500/yr at a 15% tax bracket. So basically $1000/month. Not sure what your expenses are or what your SS and/or pension income looks like but that'll be it from investments.

I'd suggest looking into using some of the inheritance to boost the retirement AND to pay down the mortgage. It doesn't have to necessarily be one or the other.

If you took $50k of that money and put it towards the mortgage, you would be done paying the mortgage around Oct of 2017. Right around when you're probably planning on retiring. So in that case you'd time it out perfectly. Retiring with no mortgage. In the meantime, you could take the remaining money and invest it for that retirement.

As always, there's no one answer fits all and it's up to your risk tolerance and what makes you sleep better at night. If having no mortgage is what does it for you then that might be the best way to go. But also give some thought as to how much money you'll be getting during retirement also. Having no bills is great but having no, or not enough, income isn't.

[daddiorick]

Again my apologies for absence... One of the big advantages that we see in paying off the house is that the monthly mortgage payment (around $1000) can be put into the 403B basically doubling our monthly 403B to about $2k/m. Do that for 5 years with a guaranteed rate of about 3.5% and by our calculations we would have sufficient retirement savings by age 62 (5 years away).

But let me add a wrinkle here. Our married son and 3 grands live 15 minutes away. He is about to lose a job through company hostile takeover. A headhunter got him an interview which has turned into a job offer that he would love to accept but it means moving 5 hours away. Crazy grandma and I are considering moving with them. Plan at present is to rent our current home (hopefully paid off) and rent in new city with rental income from current home covering rental costs in new city. That way the monthly savings incurred by a paid off house could still double the monthly contribution to the 403B leaving us in same place at age 62. But the tax implications are getting complicated. The estate contains a couple of IRA accounts which will take a hit on the tax side if liquidated and that income combined with the rental income would probably put us in a new tax bracket... So while the original challenge was to think through paying off a house, the issue now is paying off a house, renting it out, and renting another place all while maintaining solid focus on growing the retirement account(s). I hesitate to ask for more input but if I am making sense here and anyone wants to chime in, I am listening and finding this forum very helpful. Thanks.

[LivingAlmostLarge]

What are the cons of selling the house? Will you at least break even? I hesitate to rent it out and then yourself. I like the idea of moving and renting near to your son but the renting out a home? Depends.

What can you rent your house out for? That will probably determine cash flow and ROI on paying off the home. Someone with more rental experience can better determine if it's worth it. Try submitting those numbers to be run.