Should I payoff my mortgage with inheritance money?? (loan, 401k, refinance)

[sarkfollower]

I am a 31 year old teacher and I recently lost my father unexpectedly who left me a $168K inheritance. I was also recently married and we have never been in a position like this before. I just sold my townhouse and we have a combined $208K (townhouse profits plus inheritance) in a money market fund. We are finishing a basement and it will be about $40K. We owe $161K (at 6.5%) on our primary home and have the cash in hand to pay it off. I am not working now and my husband makes about 45K a year. We are wanting to start a family soon and I am getting us organized- or attempting to. Collectively, we have $216K in Roths, IRAs and 401K accounts. My husband is 41 and has 11 years in at his place of work. After paying off the mortgage we would have about 10K left over in cash for an emergency fund. We have no debt- all cars are paid off. Should we go for it and payoff the mortgage or stipend monthly our needs beyond what my husband can't provide with his salary using the inheritance money? Different people are telling us different things but I would really like to get some varied perspectives on this. I am just not confident in the market and I am not sure if it wouldn't be better to just go ahead and pay it off? Can someone tell me what they think we should do???

[sheenie2000]

I'm sorry for your loss.
A) Leave it in a money market account or a CD for at least a year until after your dad's death. You have to give yourself time to grieve and let your emotions out about what happened. It's better to leave your money safe and sound for a little while.

B) 10K isn't enough of an emergency fund especially in these times. You should have 12 months of an emergency fund (imo).

C) Suppose you pay off the mortgage, will you be able to save that extra money that you won't be using on a mortgage payment? Or will you just spend it and waste it away? Such as buying new cars, adding car payments, buying tvs, vacationing etc?
Or will you be diligent enough to save the extra money each month?

If you can't save the money then you might be better off with keeping the mortgage and saving the inheritance money.

D) Another question is how long will be in this home? Do you plan on living there forever? Or is there a possibility you will move in like 5 years?

[hindsight2020]

I'll assume you have the financial discipline to save what you'd otherwise be paying on the mortgage. Pay down that mortgage by HALF, keep a substantial amount (50% of the inheritance) on a high yield account and diversify that investment, and save the differential of the new reduced house payment. That should open up your monthly cash flow since now your housing costs are insignificant in comparison to before, while still allowing you to have a healthy amount of liquid already in the bank for emergency expenses and the like. If you up and decide to move, you retain all that equity, if you decide to live there forever, your payments are now a joke so it's a win win option. Go with half on the house half and half retained on cash, and good luck.

[Mugsy]

Follow your gut.

IMHO, keep a tax deduction. Pay down the mortgage but do not pay it off.

This is just my opinion, follow your gut.

[f_m]

You may want to determine if there is any tax on the inheritance, in which case you would have less than you think.

[grannynancy]

A topic I hate to bring up [I have been married for 28 years so not based on personal experience] is that how the windfall is distributed may impact your access to it later on should the relationship sour. In my state, inheritance money is treated differently than common property [shared by two spouses]. Not the kind of thing you think about when you are first married, but it is a consideration down the road. How you protect that asset should something happen.

You may want to talk with a good finanacial planner.

[KCfromNC]

Originally Posted by hindsight2020

I'll assume you have the financial discipline to save what you'd otherwise be paying on the mortgage. Pay down that mortgage by HALF, keep a substantial amount (50% of the inheritance) on a high yield account and diversify that investment, and save the differential of the new reduced house payment. That should open up your monthly cash flow since now your housing costs are insignificant in comparison to before, while still allowing you to have a healthy amount of liquid already in the bank for emergency expenses and the like. If you up and decide to move, you retain all that equity, if you decide to live there forever, your payments are now a joke so it's a win win option. Go with half on the house half and half retained on cash, and good luck.

Unless they refinance, paying off half the mortgage won't reduce their current payments. It will just reduce the number of payments needed to pay the loan off.

[NYSinger]

Pay it off!!! Having no mortgage is the best feeling in the world and your monthly living costs will be SO low!! The more equity, the better. I don't understand why people hold on to mortgages.

[UpsonDowns]

If you put all of that money into your home you will not be diversified enough. What if your husband lost his job and you two had to move for a new job and the housing market was down? Access to cash is freedom (just make sure that it is earning interest!).

Meet with a fee-based financial advisor (not one who works on commission based on what they sell you).

[AtlDad]

Originally Posted by KCfromNC

Unless they refinance, paying off half the mortgage won't reduce their current payments. It will just reduce the number of payments needed to pay the loan off.

It depends on who is servicing the mortgage and what the terms actually say. Here in Georgia, many loans that are issued actually have a clause that will allow you to reset your payment any time you make single payment for greater than 10% (or some value > 10%) of the outstanding balance. In this situation, if you wanted to pay off half, you would call the servicer and tell them you want to make a lump sum payment and would like to have the monthly payment reset. The loan matures at the same date as it did before but it resets the monthly obligation to the lower value.