My grandmother died, and we just received about $20,000. We're wondering whether we should use the money to pay down our mortgage, or whether we should invest it.
These days, there's rarely any reason to rush to pay off the mortgage. If you locked in low rates over the past few years, then you generally can do better by investing the money.
The key is to compare your after-tax interest rates. Paying down a mortgage with a 5.75% rate, for example, is the same as an investment that earns 5.75%. And if you're deducting the mortgage interest in the 25% bracket, a 5.75% mortgage really costs you just 4.3% after the tax benefits (although you may have to pay taxes on your investment, too).
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Two other reasons to invest the money rather than paying down the mortgage: leverage and liquidity. You already benefit from all of the home's price appreciation, whether you have 10% or 100% equity. And money you keep outside of the mortgage is much easier to access. Paying more toward your mortgage one month does not give you any more flexibility to make lower payments in future months. It just helps you pay off the loan earlier, which still may be more than a decade away. After you use that money to make extra payments, you won't be able to touch it again unless you take out a home equity loan or sell the house. If you'd invested the money, on the other hand, it's generally easier to access if you do lose your job or have an emergency and need the extra cash to make future mortgage payments.
The extra payments may make more of a difference, however, if you're nearing retirement and closer to paying off the loan. "If they have $20,000 or $40,000 left on their mortgage, I would consider having them pay off the mortgage so they don't have to make that monthly payment and psychologically they feel good," says Michael Eisenberg, a CPA and personal financial specialist in West Los Angeles, Cal.
-
Here's How To Get Organized And Work For YourselfWhether you’re looking for a side gig or planning to start your own business, it has never been easier to strike out on your own. Here is our guide to navigating working for yourself.
-
How to Manage Risk With Diversification"Don't put all your eggs in one basket" means different things to different investors. Here's how to manage your risk with portfolio diversification.
-
Credit Report Error? They All Mattercredit & debt Don't dismiss a minor error. It could be the sign of something more serious.
-
Insurance for a Learning Driverinsurance Adding a teen driver to your plan will raise premiums, but there are things you can do to help reduce them.
-
529 Plans Aren’t Just for Kids529 Plans You don’t have to be college-age to use the money tax-free, but there are stipulations.
-
When to Transfer Ownership of a Custodial Accountsavings Before your child turns 18, you should check with your broker about the account's age of majority and termination.
-
Borrowers Get More Time to Repay 401(k) Loans
retirement If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.
-
When It Pays to Buy Travel Insurance
Travel Investing in travel insurance can help recover some costs when your vacation gets ruined by a natural disaster, medical emergency or other catastrophe.
-
What Travel Insurance Covers When Planes Are Grounded
Travel Your travel insurance might help with some costs if your trip was delayed because of the recent grounding of Boeing 737 Max planes.
-
Ways to Spend Your Flexible Spending Account Money by March 15 Deadline
spending Many workers will be hitting the drugstore in the next few days to use up leftover flexible spending account money from 2018 so they don’t lose it.
