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$1 Million Dollar Mortgage....Pay Off or Invest?

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  • $1 Million Dollar Mortgage....Pay Off or Invest?

    I had one of our email subscribers reach out to me with this question:

    We recently inherited a large sum of money (7 figures). We have a little over $1 million dollars left on our mortgage.
    Should we pay it off or invest the inheritance?

    I have my thoughts, which I sent her, but wanted to get some other opinions.
    Last edited by Peds; 05-04-2020, 09:23 AM. Reason: Rule 2 violation

  • #2
    well minimally shouldn't we at least know the interest rate? and perhaps if it's a 15 or 30 yr? fixed or ARM? knowing the mortgage balance isn't enough information. Also prior to the inheritance what was their income? where I'm going with that is if their income is something like $300k or less and they took out that large a mortgage, it gives us a sense of their personal finance habits and how likely they are to blow through the inheritance (the more likely they are to blow through it on hookers and coke the more I'd say pay off the mortgage rather than invest)

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    • #3
      Not enough information. In order to keep my end of the bargain I can provide an answer with the information given: 'Maybe.'

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      • #4
        Definitely not enought info to privide a well-reasoned response. Once all pertinent info is reviewed, if it's still a close call then I think it's rational to split it 50:50 and refinance the 1M mortgage to a 500k mortgage at a great rate and invest the rest. Rates right now are very good. Interest on a mortgage over 750k can't be deducted unless this is a grandfathered mortgage. But as others have said it depends on what the whole picture looks like and you haven't even told us what the current rate or term is, let alone a basic outline of this person's finances. How much do they earn per year? How much do they have saved up and invested? What are the current mortgage terms? Age. Future goals/plans.
        Last edited by orthodds; 05-04-2020, 01:44 PM.

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        • #5
          I don't need more information. The answer is clear: 100% yes. There is no need to remain leveraged when you have that much money.

          Edit: Just re-read the OP - I misread it as a 7 million inheritance. Based on that I would need more information.
          Last edited by familydocPA; 05-04-2020, 01:46 PM.

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          • #6
            Lack of information? There is no information. 1 million dollar mortgage and a 7 figure inheritance. That could just barely cover the mortgage or make them set for life. Are they working? What are expenses like? Are they 25 or 55?
            how would they invest the money if they did.

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            • #7
              I would NOT pay off the mortgage, assuming they still have a job and also don't have another 1M debt for biz or additional homes.

              Re-fi to historically low rates however, I would do in an instant!

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              • #8
                Need more information. One would worry on a person with $1M debt mortgage what will happen if you DON'T payoff the mortgage -- Will it be invested ... or spent.

                As an amateur looking at just the data given -- i would worry about the latter.

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                • #9
                  I had a similar choice several years ago. I financed my mortgage at 2.5% and invested the money (15 year term and the interest was fully deductible back then). I came out ahead by roughly 500k compared to where I would have been if I had paid off the mortgage. When rates are really low I think taking advantage of them can be a good move. But it depends on the situation.

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                  • #10
                    In the early years, I put roughly 75% of extra cash each month in investments and 25% to pay down mortgages. Then later I did half and half. The mortgage pay down is a sure thing, low risk, usually lower reward, but just the same, the return is guaranteed. The stock investments are higher risk, higher volatility, and higher reward, at least in good times.

                    These days 100% of my leftover cash goes to taxable, as there is no debt left to pay.

                    For the OP, things like liquidity may matter. How much of an emergency fund do they have? How secure is their flow of income? How much do they currently have in retirement funds? How many years until retirement? The answer to the original question should be part of a comprehensive financial plan. The answer is different in different circumstances.

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                    • #11
                      Pay off 50% of the mortgage $500K. The other $500K put into high yield savings can be on hold for a potential investment opportunity but be careful this is a dicey market. Do not spend it either, spend less than you earn. If you're unsure about investment, you can continue to accelerate mortgage payments on a schedule that works for you. Honestly, I personally, given my personality, in this market would opt to keep paying down the mortgage than risk the current market environment at least until there is more clarity on risk/reward. Not everyone here agrees with this. I tend to favor low risk.

                      Otherwise, if you have cash flow issues or a relatively high interest rate, you can refinance the remaining $500K to a lower monthly payment, rate, term, etc. A $500K HELOC with your newfound equity (usually no closing costs) can give you further potential options down the road. It's all about options. It's good to have options. Thus you'll still have access to $1M while at the same time have paid off half of your mortgage!

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                      • #12
                        Mortgage rates are low, & with a large inheritance as stated securing a favorable interest rate shouldn't be very difficult. I'd refinance & invest the inheritance.
                        $1 saved = >$1 earned. ✓

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                        • #13
                          I reached back out to them and here's more information:

                          4.25% mortgage, 30 year fixed
                          Income is currently combined $400-450K/yr
                          Age: both are in their mid-40's
                          Currently have $1.5 million saved in various retirement and post retirement accounts along with $200K in passive syndications

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                          • #14
                            With the additional info I would split the difference. 50% to mortgage along with refi to 15 years. 50% to taxable account investments 70/30.

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                            • #15
                              Originally posted by Hatton View Post
                              With the additional info I would split the difference. 50% to mortgage along with refi to 15 years. 50% to taxable account investments 70/30.
                              Yes. This is pretty much exactly what I would recommend as well, pending more info about what this person's goals/plans are in terms of retirement, large future purchases etc. Would also be helpful to know current AA for money invested/saved.

                              I'm curious, debt free periodontist/blogger, about what answer you gave this person. The first step in making a proper diagnosis and then an appropriate treatment plan is to gather all--or at least sufficient--relevant info. It doesn't appear you did this before you gave this person your "expert" opinion.

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