What to do with big payoff?

[Z3Dreamer]

Will receive about $280k, net of taxes in a few weeks. Have a $175k (current principal), 3.25% mortgage with 13 years left. What to do with proceeds:

1. Invest it all long term in Van/Fid funds as we don't need the money in the next few years. Of course using the appropriate AA.
2. Payoff the mortgage and invest the rest using the rules above.
3. Our kids suggest giving it to them.

 

[JRon]

#2 - there’s nothing like the feeling of being debt free.

 

[ERD50]

#2 - there’s nothing like the feeling of being debt free.

#1 - there’s nothing like the feeling of having 3.25% fixed rate money working for you. I sleep well at night, knowing this money is working for me, and easily liquidated if needed.

Once it is in the house, it's not so liquid. And a HELOC later may be far above 3.25%.

So there's two sides to the coin, do as you see fit. Including #3 (within the annual gifting limits to avoid paperwork and possible future taxation).

-ERD50

 

[TheWizard]

We need to know your ages and present investment amounts to give a good answer.
I would not pay off a 3.25% mortgage.
I would probably invest all of this windfall along with paying an additional amount to principal on your mortgage each month.
If your mortgage payment is $2150/month, then just pay $2500/month going forward, etc...

 

[VanWinkle]

I would probably pay off the mortgage(I actually did this in 2016) but I'm not sure it was the correct decision. I like a hybrid approach of investing the proceeds in a conservative fund(Wellesley Income or 35/65 index) and using any profits to pay against the house. If you make 15 grand, put it against the house that year. If it sees no gains or slight loss, just keep making your original payments.

VW

 

[finnski1]

Will receive about $280k, net of taxes in a few weeks. Have a $175k (current principal), 3.25% mortgage with 13 years left. What to do with proceeds:

1. Invest it all long term in Van/Fid funds as we don't need the money in the next few years. Of course using the appropriate AA.
2. Payoff the mortgage and invest the rest using the rules above.
3. Our kids suggest giving it to them.

#1 AND do a 15 yr refi at present rates of only around 2.25% with no points on your current mortgage. Payment around $1147 for a 175k mortgage.

 

[COcheesehead]

We got a seven figure payday from a real estate deal last year.
First thing I did was send in estimated taxes.
We kept some in cash for another opportunity that should happen next year.
I then invested the rest in some index ETFs - all of which are up - so far.

If your rate is low and you can itemize, paying off the mortgage should should be way down the list. Concentration of funds in an illiquid asset, time value of money, flexibility, leveraged return on an inflation hedge and a whole host of other reasons keeps me from paying off the mortgage.

 

[Montecfo]

In these inflationary times, mortgage payoff is not a good idea in my view, since you pay back dollars which are less valuable every day, a big advantage of having a mortgage.

Assuming inflation returns to a more typical level, I would consider payoff if you are unable to itemize deductions and thus get a tax benefit for mortgage interest.

That would mean your fixed return from payoff is 3.25% divided by (1 minus your marginal tax rate). If you are in a 28 pct combined fed and state bracket, That's 4.33 pct guaranteed.

Something to think about.

 

[corn18]

#1 AND do a 15 yr refi at present rates of only around 2.25% with no points on your current mortgage. Payment around $1147 for a 175k mortgage.

I second this. I love and hate our 2.25% 30 year fixed rate mortgage.

Love it when inflation is 6.8%. That means I am making 4.55% real on my mortgage. Holy crap. I am making money on my mortgage? This doesn't even factor in what the market has done. No brainer.

Hate it when I think about not being debt free. I hate typing debt free except for mortgage. Feels like failure.

 

[Hamlet]

I would probably pay off the mortgage(I actually did this in 2016) but I'm not sure it was the correct decision. I like a hybrid approach of investing the proceeds in a conservative fund(Wellesley Income or 35/65 index) and using any profits to pay against the house. If you make 15 grand, put it against the house that year. If it sees no gains or slight loss, just keep making your original payments.

VW

Paying off your low-interest rate mortgage lowers your risk, but you typically end up with less money because investments normally outperform the interest rate you are paying. The key work being "normally."

I lean towards paying down the mortgage as I get older and the numbers get bigger, but neither answer is really "wrong." It boils down to your comfort with debt. Getting rid of the debt ( even the very low rate mortgage debt ) reduces your tail risk somewhat. But that is very likely to cost you some substantial money in lower returns over time.

 

[street]

I would do #1 in this case and times we are in. However, I like being debt free and would not hesitate in the future to pay that debt off. You have time so invest it for the time being is my 2¢.

 

[Z3Dreamer]

Thanks for the quick responses. DW likes VW's response best - using the profits from the invested funds to pay down mortgage.

 

[OldShooter]

The "pay off the mortgage?" question gets debated here endlessly. The answer is that it is more a personal than a financial decision.

Purely financial, interest rate arbitrage when the mortgage interest rate is low is probably the best decision. The zealots for this approach often neglect to mention the risk and taxability of the alternative investment of funds. So it is good, but not as good as it looks at first blush.

For us, it was not a financial decision. We just like being debt-free in our two homes.

 

[Time2]

I second this. I love and hate our 2.25% 30 year fixed rate mortgage.

Love it when inflation is 6.8%. That means I am making 4.55% real on my mortgage. Holy crap. I am making money on my mortgage? This doesn't even factor in what the market has done. No brainer.

Hate it when I think about not being debt free. I hate typing debt free except for mortgage. Feels like failure.

How about, debt free although I have my mortgage money working for me.

 

[ERD50]

Thanks for the quick responses. DW likes VW's response best - using the profits from the invested funds to pay down mortgage.

That strikes me as the worst way to do it. The problem that I see is, you give up liquidity on the money you put against principal, and you haven't lowered your payments (only the amount of time you will need to make them).

At least if you pay it off in full (which I would not choose to do at these rates anyhow), you've eliminated the mortgage payment. The partial pay-off doesn't even do that.

The "pay off the mortgage?" question gets debated here endlessly. The answer is that it is more a personal than a financial decision. ...

I kinda disagree. It is a financial decision. Some people let emotions affect their thinking regarding the financial decision.

How about, debt free although I have my mortgage money working for me.

I like that!

-ERD50

 

[Markola]

I’d spread it proportionally across the asset classes of your existing, well-thought out asset allocation. If you don’t have one yet, it’s time to create one.

 

[athena53]

Anyone want to offer an opinion on whether to dump the entire amount in the market now or over time? I'm dealing with a similar amount, an inheritance, and have invested about 10% of it but am thinking of staging it over time. 10%/month over the next year? I don't know- I have no immediate need for the $$.

 

[ERD50]

Anyone want to offer an opinion on whether to dump the entire amount in the market now or over time? I'm dealing with a similar amount, an inheritance, and have invested about 10% of it but am thinking of staging it over time. 10%/month over the next year? I don't know- I have no immediate need for the $$.

Data says dump it in all at once.

That said, there can be buyer's remorse if you dump it in, then the market tanks, so that says you might at least feel better if you do it over time. But (author and financial blogger) JL Collins made a very good case for "dump it in".

He basically said, if you do it over a year or two, then guess what - you are now 100% invested. So what's the difference? Do it now, or do it later, you still face the prospect that it is all invested. And history supports "dump it in" (markets on average, go up - that's why we invest.

-ERD50

 

[athena53]

Data says dump it in all at once.
<snip>
He basically said, if you do it over a year or two, then guess what - you are now 100% invested. So what's the difference? Do it now, or do it later, you still face the prospect that it is all invested. And history supports "dump it in" (markets on average, go up - that's why we invest.

-ERD50

Thanks- I think I need to do some shipping!

 

[rk911]

#2 - there’s nothing like the feeling of being debt free.

+1. nope...+1000

 

[COcheesehead]

Paying off the mortgage is an emotional decision, not a financial one.

 

[yhoomajor]

33.3% -Invest
33.3% - Towards mortgage
33.3% - give to your kids.

 

[jevans04]

That strikes me as the worst way to do it. The problem that I see is, you give up liquidity on the money you put against principal, and you haven't lowered your payments (only the amount of time you will need to make them).

At least if you pay it off in full (which I would not choose to do at these rates anyhow), you've eliminated the mortgage payment. The partial pay-off doesn't even do that.

-ERD50

Most mortgage companies will recast your mortgage for a fee of a couple hundred dollars after making a large lump sum payment. They will calculate a new lower mortgage payment based on the new principal owed amount, keeping all other mortgage terms (rate, years remaining) the same.

 

[rk911]

Paying off the mortgage is an emotional decision, not a financial one.

not for us. i retired at 55 so health insurance for me for the next 10-yrs was an issue. i was lucky as i could remain on my employer's group policy until i turned 65 but had to pay the premium. my projections indicated we could afford to pay both our mortgage and the premium but it didn't leave a lot of daylight and i didn't want to cut it that close. we always wanted to walk into retirement debt free and had been paying extra $ each month on the mortgage for years to do just that but now making that happen was a priority.

 

[mrfeh]

Of course, it isn't an either/or proposition. You can do some #1 and some #2.

That's what we did with spare cash 20 years ago (although our mortgage was 7%).