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Reader Question: Invest $100,000 or Pay Off Mortgage

This article was written by in Debt Reduction, Investing. 37 comments.


To someone with debt, receiving an inheritance can feel like winning the lottery. Occasionally, an heir doesn’t realize money will be coming her way and hasn’t planned for the windfall or thought about her options. Even those who do plan often realize that contemplating options for managing a potential windfall is quite different from making decisions once that money is in hand. There is a tendency to have a riskier approach to managing money until the windfall arrives in the bank account. Often, preservation instincts kick in and prevent people from taking action.

Whether to use extra money to invest or pay off a mortgage is a common concern. Economists look at the numbers. If, after taxes, you can earn more in interest or appreciation by investing the funds than the amount of interest you’ll save by paying off a mortgage early, it is a better financial decision to invest rather than accelerate debt repayment. In its most simple approach, this ignores that the savings from paying off a mortgage early are guaranteed, and finding a rate that would beat the mortgage for investments could be very risky.

A Consumerism Commentary reader offered the following question:

I am a single 53-year-old female with a 13-year-old daughter still at home. My mother passed away recently and I inherited a little over one hundred thousand dollars. My mortgage payoff is $41,000 and I have a second that is $14,000. My Lutheran Brotherhood rep tells me to invest all of it and to not pay off my mortgage since I only have seven more years on the loan at 5% interest. My gut tells me that I should pay off my mortgages to be totally debt free. Any thoughts would be greatly appreciated.

Nothing beats finding and working with a trusted financial planner when handling these questions. Being debt free is obviously important to this reader. Paying off debt is a burden. Every month, the work you do generates income already designated for someone else. Debt may not be slavery, but you will never fully own your income and the work you do to create that income until you are free to do what you want with all of your (after-tax) income.

The representative may have positioned 5% as being a low interest rate. It’s not a terrible mortgage interest rate, and you might even be benefiting from the home mortgage interest tax deduction. With only seven more years left in the loan, however, the biggest tax benefit is behind you because the majority of each mortgage payment goes to the principal of the loan rather than interest.

Can you beat 5% by investing the $100,000? It’s possible, but not guaranteed. A Lutheran representative should be aware of the risks; recently, Thrivent Financial for Lutherans was one of a select number of organizations that lost almost all of its investments due to a risky and possibly fraudulent investment scheme at J.P. Morgan. A proper mix of simple stock and bond index funds could beat 5% in the long run, but performance over shorter periods of time, like a decade, could be worse than the 5% you’d achieve by paying off the mortgage.

Even if you use $100,000 to pay off the remaining mortgage balances, you’ll still have $45,000 left, so it’s not an all-or-nothing question. Going further, if you strongly feel that investing is a better way to secure your financial future but you also feel strongly about reducing debt, you might be more comfortable using the windfall to pay off half of your remaining mortgage balance, leaving a larger remainder to invest. This would give you the benefit of exposure to stocks for the long-term while greatly reducing your monthly mortgage obligations or allowing yourself to finish paying off the mortgage a few years earlier than expected. If your daughter is 13 now, she may move out in five years. That could be a good time to downsize your living arrangement to save money, and when that happens, you may feel more comfortable if your house were to be completely paid off by then.

One other thing to consider is whether the representative you spoke to is also representing an organization like Thrivent Financial for Lutherans. This is a non-profit organization designed to help the community of Lutherans succeed financially through prudent investing. Due to his affiliation, he would suggest investing. Not only is it an acceptable choice and probably not a terrible decision, but his affiliation with the organization would certainly sway his advice towards the benefits he can provide. If you walk to a car dealership an ask a salesperson, “Should I buy a car or pay off my mortgage?” you can expect the car salesperson to suggest buying a car — from him.

This question is open to anyone who would like to comment. Should this reader use a $100,000 inheritance to pay off the remaining $55,000 balance on the 5% mortgages or invest the entire windfall?

Published or updated June 24, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 37 comments… read them below or add one }

avatar Investor Junkie

One important question is how much money does she have saved for retirement? If she’s on track, pay down the debt.

If not, it may make sense to at least push as much money into pre-taxable accounts. (ie. 401k, IRA, ibonds) Also does she plan on helping her child’s education? If so then putting some money into a 529 might make sense also.

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avatar lynn ♦155 (Cent)

I can’t tell you how sick I am of hearing this same advice over and over. (No personal offense meant) It was good advice in the past, but these are different times. The comfort a paid off mortgage can provide is astounding. She’s alone and bravely raising a daughter, being both mother and father. The daughter’s education is her responsibility, not the parent’s.

If the money went into a retirement account, the government could change the rules and she would have losses. There is a fear rising that this is a move they are discussing. If it’s true or not, I can’t say. I do know every rumor starts with a bit of truth.

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avatar david M

Since the mortgage is only 5% – I say it’s a toss up – no right or wrong answer – she should go with her gut instinct.

However, saving for retirement and/or college education sounds like a good idea to me.

Now if was non deductible credit card debt at say 12% or more – I would say pay off the debt!

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avatar Andrew

There was no mention of an emergency fund (i.e. 6 to 12 months of living expenses) That needs to be in place before EITHER paying off the mortgage OR investing. No ifs, ands, or buts on that.

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avatar Jon -- Free Money Wisdom

I totally agree with you on that, Andrew! Emergency funds come first and foremost. Emergency fund, pay off debt, and then invest. I would say to put a fraction of the money into savings after saving for an emergency fund and then pay down the debt.

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avatar lynn ♦155 (Cent)

This information makes the most sense.

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avatar Krantcents

Chances are the second is not 5%. I would look at the net cost of the mortgages and see if I could conservatively invest the money at a better return. If not, one choice would be to pay off the second and invest the rest. Then check the net interest on the first to see if you can invest at a greater return. If not, pay it all off.

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avatar Mike

I’d invest it in increments over the next 12-18 months as the market either continues to dip or remains soft.

Yes most of the tax benefit is gone with only 7 years left, but most of the interest has also been paid by that point as well, so it isn’t really as clear a 5% vx. whatever you can make in the market. Besides, even the yield on the S&P 500 is about 1.75% now. You could easily find some good dividend funds (DVY is 3.25%) that wouldn’t need to appreciate much to beat 5%…

Of course, I’m assuming this is not money you will need in the next 3 years.

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avatar shellye ♦107 (Cent)

I would fund a 6-month emergency fund, pay off the mortgage completely, and invest the rest in a COLLEGE account for her daughter. College tuition is only going up, and her daughter will be there in a short 5 years.

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avatar Stacking Paper

I agree with Investor Junkie, take some investing into consideration before just paying off a larger debt. Sure it would be nice to pay off a mortgage loan, however, as Andrew mentioned there should always be an emergency fund in place even before setting aside retirement savings. If there is one thing I know for sure, its that nothing is certain in the future. Proper planning is your best defense against an up and down financial expense roller coaster.

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avatar wylerassociate ♦162 (Cent)

she should pay off the mortgage and the remainder should be invested.

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avatar No Debt MBA

Set up and efund, max retirement accounts for the year, pay off the mortgage.

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avatar Robert @ The College Investor

Given the current economy, I would pay off my mortgage since it would be a higher return for me, most likely for the next 5 years or so.

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avatar rente-doorlopendkrediet

In this economy I would choose the ‘safe’ option. Just keep on paying off my mortgage. It is safe and in my eyes a better investment.

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avatar JC

I like shellye’s suggestion with a slight change. Fully fund 6-months emergency fund, then put 5k into a Roth IRA at Schwab or Vanguard using low cost index ETFs, pay off the mortgages, and put some money away in a 529 for the kiddo.

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avatar Brian Plunkett

JC’s comment is spot on. The advisor should have given her the option of doing what her gut says (pay off her debt) plus have given her the option of investing for hers and her child’s future.

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avatar Hunter

Emergency -> Retirement -> Mortgage/Invest (based on personality) -> College

After the obvious emergency fund, retirement is the biggest concern. She can stash 6k (she’s over 50) into the Roth. It’s easier to get a student loan than a retirement loan. Wouldn’t be too worried about paying for college.

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avatar Kate Kashman

This is pretty much exactly what I would say. She states that paying off her mortgage would make her debt free, so I am assuming that there is no other debt. Emergency fund first, then put as much as legally possible into tax-advantageous retirement accounts (IRA, 401K, 403b, whatever). If there is money left over, consider the mental health aspects of paying off the mortgage and/or investing. While there is certainly an important math part to the decision, the “how I feel” parts can not be ignored.

I’m a bad parent when it comes to college. I will help my kids pay for college out of my current income when the time comes, but I will not sacrifice my financial stability for their college fund.

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avatar Oskar

There is really no right or wrong here it depends on your personal values and what is more important to you, do you want security or do you want to gamble? Personally I would begin with paying of the morgage but that is just because I prefer security to chance.

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avatar Cejay ♦1,521 (Half-Dollar)

I am very conservative and I say pay off the mortgage. You have no guarantee of anything for the future so this means that you are debr free. I paid off my mortgage last year and the freedom this has given me is priceless. I can now concentrate on investing for my retirement and feel that I am better able to handle any riskier ventures.

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avatar Ji,

Pay off the mortgage. Take the extra money that you will have every month and invest that, now that there will not be a mortgage payment.

Mortgage does not equal $100k, if read correctly, invest residual. But only if there is no emergency fund.

Get a 2nd opinion from another qualified person on investing options. Have a couple of relatives going though the same organization and in reviewing the advice and investments, I have questions on the choices. But YMMV.

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avatar Bobka ♦13 (Newbie)

Faced with the same question several years ago, I chose to pay off the mortgage. I thought it was a good move than, and I still do. With the elimination of a mortgage payment. I was able to save enough from my earnings to early retire. My suggestion for the reader with the inheritance is to pay off the mortgage and invest the remainder. Then, live as before and,also invest what the reader would have otherwise paid out for mortgage payments. With patience, the end result will be peace of mind and a comfy nest egg.

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avatar rewards ♦31 (Newbie)

It’s been said already, but I echo the priorities as being first Emergency Fund, then Retirement (which is what most investing is for anyways), then Mortgage and/or College Fund (as a tie for dead last).

From a behavioral finance perspective (isn’t most personal finance behavioral?), one can do all four simultaneously, as long as they are weighted in order of priorities.

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avatar STRONGside

I would definitely go ahead and pay off the remaining mortgage of $55,000. This would give this woman a lot more flexibiity in her situation, and allow her to better support herself and her daughter with must less stress. Being debt free caries an intrinsic value that IMO far outweighs the security of putting $100,000 into a non-guaranteed retirement account. Granted, she will have $45,000 remaining that she could invest, secure in an emergency fund, or fund a college savings plan. If her expenses are less b/c her mortgage is paid off, she will also have much less to put into an emergency fund to secure 6 months worth. Flexibility and being debt free should be top priority!

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avatar Ceecee ♦53 (Newbie)

I would pay off the mortgage. The emergency fund needed may be a little less with a home owned free and clear. And there will still be money left. But the big reason is that you should follow your gut—-do what makes you sleep at night. AND—5% earnings on investments guaranteed is not that easy to find these days.

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avatar Financial Independence

The debt may not the be slavery but one thing is for sure – it would be difficult to invest 100 grand with no financial background at 7-8% return.

So from financial point of view it definitely make sense to pay off mortgage. For sanity of mind as well.

Obviously second house is a rental property. So to achieve maximum potential for financial independence I would pay of mortgage and invest the rest into main property or move on to a new one.

This will definitely make sense, if she is going to retire in you home.

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avatar DonnaFreedman ♦90 (Newbie)

Here’s how I see it: The woman is single and has a child. If she got sick next week or lost her job next month, who would pay her mortgage? Where would the two of them go if the house were foreclosed?
Thus I’d suggest paying off the mortgages, then funding an EF and some kind of retirement planning if she doesn’t already have them. (She might, you know, and just not have mentioned them.) Anything left could be invested.
If her house were paid off and she later lost her job, at least she’d have a roof over her head and could probably keep the lights on with unemployment benefits. She could potentially rent out a room to bring in a little extra.

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avatar skylog ♦368 (Nickel)

i will echo what several other posters have said:

- fund the EF
- pay off the mortgage
- invest the remainder or use it for a college fund

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avatar Kathryn

The thing about mortgages is they are a big risk…..even if you’ve paid off a big chunk of the principal, you are still on the hook for that same payment each and every month. If anything happens and you cannot make the payment…you could be thrown out of the house and lose lots of money. So, when people ask this question, I always suggest that you save up enough money in a gigantic emergency fund, invested conservatively, that will protect you if you lose your job…then when you have enough, pay off the mortgage all at once.

Bad advice to pay some (but not enough) toward the house….that money becomes unavailable to help her out should she lose her job. (No home equity loans for the unemployed.)

In your scenario….she has enough, so she should pay off the mortgage in full, then invest the remainder.

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avatar Ben

We really do not have enough information to make a sound recommendation. I suggest a complete financial evaluation be prepared first – starting with a cash flow and net worth statement. Does she have other debt at higher interest rate? Is she able to meet her current expenses easily? Does she anticipate any special financial needs in the future- How much and when? How healthy is she? What are her career prospects? Does she have any special goals or dreams. What investment and/or money management skills, knowledge and experience does she have. What is her tax profile (tax bracket, uses itemized or standard deduction, etc.? What is her risk tolerance? Does she have a will? Who will care for her daughter if something happens to mom?
Note: the rep doesn’t earn a commission on mortgage payoff! Being debt free is great! Debt should be used wisely – with a purpose – can I earn more then it costs or is debt the only option to secure needs?
Saving 5% on the 1st mortgage (probably more on the 2nd) is hard to beat with little risk (1 to 2% on Cd’s, or savings accounts – unless she knows how to invest – do not depend on “advisers” to do it for you!

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avatar Dustin

Another item that is very often neglected are the income tax implications of paying off a mortgage. Conventional wisdom says that having a mortgage is good, especially with a low rate, as you have more you are able to write off. However, later in a mortgage, you have less to write off each year.

The other fallacy is that writing off mortgage interest is really as beneficial as many assume. Consider having $10k in mortgage interest and other real estate related fees (property taxes, etc.). For 2011, the standard deduction is $11,600 for married filing jointly, $8,500 for head of household, and $5,800 for single. When itemizing, you are only really writing off whatever EXCEEDS your standard deduction. So, if the subject of the discussion is filing as head of household (being a single mother), and she only has $10k to itemize, she is only really getting a value of $1,500 of write-offs; if she pays off the mortgage, she can just opt for a standard deduction and be without the expense of mortgage interest. In addition, in the years to come, money saved by lowering her expenses is tax-free, whereas increasing her income to meet these expenses, either via working or through investments, is not tax free. Further, as her income increases the more her tax rate increases AND the fewer deductions and credits she will be eligible to receive.

As far as an emergency fund goes, if she pays off her mortgage, her monthly expenses should be drastically lower. If she carries no debt, I would have to imagine that her monthly expenses would be exceptionally low. This would make an emergency all the more attainable, especially since she will only need to use about half of the money to pay down her mortgage. Plus, she will more easily be able to add to the fund without a mortgage payment.

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avatar lynn ♦155 (Cent)

Right on and well thought out.

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avatar Craig Manske

Debt freedom before Investment, there’s no question. Debt freedom has no unforeseen circumstances. For instance: http://www.propublica.org/article/bank-errors-continue-to-cause-wrongful-foreclosures

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avatar BK Lawyer

Investing money at this point has become risky and uncertain. I unfortunately have seen quite to often people making decisions that involve investment money with the hopes of using the returns to pay off their mortgage or purchase other necessities. In my line of work, we handle people who are going through financial difficulties and the best bet from our point of view is to secure your residence and then look at other investment opportunities. In this scenario at least if the returns are not there on the investment, you don’t have to worry about keeping a roof over your head.

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avatar Leopold

I’m a professional investor, and I will tell you that she should pay off her mortgage. It sounds like she has already done a good job in this direction. Here are my reasons:

1. She may not have much experience investing that kind of money. People who lack investing experience that suddenly have a “large” amount of money to invest often get taken for a ride. That $100,000 could quickly become $80,000 or less.
2. There is an incredible freedom in not having any debt.
3. Whether she has invested for retirement or not, it is better to have lower expenses. I can’t tell you how many people I see who are 65 or 70 years old, and they just refinanced their home AGAIN with another 30 year mortgage a few years ago. Yes, they have some money in savings (sometimes), and never enough. They can’t work much longer, but feel they have to so they can cover expenses, including a stupid mortgage that should have been paid off years ago. These people are out of their minds. Don’t join these fools. One of the best “retirement funds” you can have is to eliminate future expenses.
4. The mortgage interest deduction will never be an issue for this woman. Her interest payments on this low a mortgage will never exceed the standard deduction.
5. Some people will tell you that you can invest the money for higher return than she is paying on the mortgage. Maybe. All investment has risk. Some investment is high risk, some is medium risk, and some is low risk. I see people who should know better not consider the risk of an investment. Higher returns equals higher risk. Investment returns with equivalent risk to paying off the mortgage will not yield the 5% she is paying. She MUST increase risk to get a higher return than 5%. This is where most people get taken for a ride.
6. Emergency fund? Law of attraction at work. If you have an “emergency” fund, I guarantee you will have a lot of emergencies in your life. Let’s have a “contingency” fund instead. Even after paying off the mortgage, she will have a good amount of money left over for BOTH contingency and investing.
7. College for the daughter? Not her responsibility. Daughter can go to state school and work her way through it with some student loans. Excellent education for low cost. How can Mom help out with college? “Honey, I have this nice paid off home where you can live . . .”
8. And with a paid off mortgage, she will have more money available monthly. This money can go towards . . . investments. Or she can choose to visit her sister for a couple months and not worry about how to cover the mortgage. She now has FLEXIBILITY. So important.

Good luck.

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avatar rob

Best advice of the bunch!

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avatar Tortoise Banker

I hate to say it, but even at historically low interest rates I’d have a hard time NOT paying down a mortgage balance, as long as my emergency fund, short term needs like car replacement, and 401k match were taken care of. I’d max my roth for the year and put the rest to the mortgage. Nothing like owning your home outright and sleeping SOUNDLY at night!!!

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