Financial Question

[jaha2000]

Obviously i am talking to a financial planner about this, but of course his opnion is to invest so i want some other opnions.

My grandfather recently passed (it was expected, he was 90 and in poor health). I am going to be recieving a large sum of money out of this deal (500000+).
Little background, I am 26 years old and a Mechanical Engineer. I have a home that i purchased three years ago when they were giving mortgages away. I have an 80/20 loan with around 140,000. My other debt is minimal (less than 5000).
Seems to me the smart thing to do is to pay off my high interest 20% loan, and my other small debt and invest the rest. My financial guy just wants to pay off small debt and invest, not worrying about the mortage.
I would think it would be important to gain some equity in my home cause for all purposes at this point i have none? This will also lower my payment by 250 a month or so which is never a bad thing....
Ideas?

 

[venkman]

With the market the way it is today, do you really want to put a lot of cash into a depreciating asset like your current home? If you can earn a return greater than your mortgage rate (which shouldn't be hard considering your statement of getting a mortgage when they were giving them away) then it is much more prudent to invest than to pay off your loan.

 

[kranky]

There's no "right" answer. If you want to pay down on your mortgage, that's fine. But don't do it because you have no equity, because you could have equity instantly any time you felt like taking some of your inheritance and applying it to your mortgage. Remember once you put money into your mortgage, it's hard to get back out. You lose flexibility. I can't think of any good reason why you need to spend money to buy equity.

You should pay off your 20% loan, that's a no-brainer.

Your financial guy might be making a commission on whatever you invest with him, and if so that could be a reason he doesn't want you to pay down the mortgage. It would mean less money to invest, and therefore less commission for him.

 

[Dr. Detroit]

I'd pay off the higher rate 20% mortgage and keep the 80% mortgage outstanding.

Once that is paid off, I'd take your free cash-flow, the $250 a month and ensure you are investing in a 401K plan or a IRA.

 

[bsobel]

What are the rates in the 80 and 20 loans? I think some people read that as 20% interest since your being told to pay it off without asking what your paying on it.

 

[sactoking]

What are the terms of your PMI agreement for the 20% loan? Can you eliminate PMI with 80-78% LTV and an appraisal? Or do you have one of the agreements that stipulates 78% LTV or 5 years, whichever is later? Assuming you're not tied into PMI for two more years, pay off the 20% loan. You'll reduce your monthly P+I payment, gain equity, AND stop flushing PMI down the toilet each month.

If you're stuck in PMI for two more years, I'd put the 20% loan payoff amount into a separate 1-year CD and plan on using it to pay off the loan in two years or reevaluate the investment a year from now. There's no need to tie it up any longer than that and your professional financial planner will have a conflict of interest if they advise you to invest in more liquid, more risky, and more lucrative (for them) instruments.

 

[IHateMyJob2004]

If I ever got a gift like this, I would eliminate all my debt. That is, pay off all credit cards and the mortgage.

You are still going to end up with $300K pre-tax. A sum most would love. Is this something that would upset you?

Your financial planner is an idiot. Open up an Ameritrade account and buy an S&P index fund. I would advise stocks to buy, but you need to buy them, not me. I would advise you go to the gurufocus.com forums (where I am a mod) to learn about investing prior to investing. Till then,. an index fund is your best bet.

All your financial planner wants to do is make a commission off of you. He could care less for your well being. He wants to make money. If you have a 20% interest rate on your mortgage, you need to pay it off ASAP. Your financial guy should be telling you to pay off the debt with the highest interest rates first. THAT IS A RULE AND A SIGN TO NEVER SPEAK TO HIM AGAIN IF HE ADVISED OTHERWISE!

Anyways, with $300K, if you get a 3% yield that is $9K each year.

 

[HannibalX]

Pay off the house completely.

Put the rest in a 5-year high interest CD and live off the interest checks.

 

[Garet Jax]

Originally posted by: jaha2000
Obviously i am talking to a financial planner about this, but of course his opnion is to invest so i want some other opnions.

My grandfather recently passed (it was expected, he was 90 and in poor health). I am going to be recieving a large sum of money out of this deal (500000+).
Little background, I am 26 years old and a Mechanical Engineer. I have a home that i purchased three years ago when they were giving mortgages away. I have an 80/20 loan with around 140,000. My other debt is minimal (less than 5000).
Seems to me the smart thing to do is to pay off my high interest 20% loan, and my other small debt and invest the rest. My financial guy just wants to pay off small debt and invest, not worrying about the mortage.
I would think it would be important to gain some equity in my home cause for all purposes at this point i have none? This will also lower my payment by 250 a month or so which is never a bad thing....
Ideas?

Don't forget to take into consideration that fact that you can claim mortgage interest. With the low rates on interest and the mortgage interest claim, it is better to invest your money if you expect to be able to earn > 4%-5% on it.

 

[bsobel]

If you have a 20% interest rate on your mortgage

The very fact you think he has a 20% interest rate on his loan shows you shouldn't be giving advice.

 

[JS80]

Mortgage = tax advantageous. Don't pay the mortgage.

 

[JS80]

Originally posted by: IHateMyJob2004
If I ever got a gift like this, I would eliminate all my debt. That is, pay off all credit cards and the mortgage.

You are still going to end up with $300K pre-tax. A sum most would love. Is this something that would upset you?

Your financial planner is an idiot. Open up an Ameritrade account and buy an S&P index fund. I would advise stocks to buy, but you need to buy them, not me. I would advise you go to the gurufocus.com forums (where I am a mod) to learn about investing prior to investing. Till then,. an index fund is your best bet.

All your financial planner wants to do is make a commission off of you. He could care less for your well being. He wants to make money. If you have a 20% interest rate on your mortgage, you need to pay it off ASAP. Your financial guy should be telling you to pay off the debt with the highest interest rates first. THAT IS A RULE AND A SIGN TO NEVER SPEAK TO HIM AGAIN IF HE ADVISED OTHERWISE!

Anyways, with $300K, if you get a 3% yield that is $9K each year.

lawl?

 

[HannibalX]

Originally posted by: JS80
Mortgage = tax advantageous. Don't pay the mortgage.

Owning your home = greater advantage.

 

[jaha2000]

80% has a 6.25 interest rate.
20% has a 8.45 or something interest rate, plus its on a ballon...
To me its a no brainer, pay off the 20%, keep the 80% for the tax writeoff and invest the rest, aka, roth, CD's ect...
I dont have PMI... thats what 80/20 does for you...
Being that as i make good money i know its not smart to have my whole mortgage paid off, i would being paying 2 grand a year on my income taxes even claiming zero (been there done that)

 

[OCGuy]

Originally posted by: sactoking
What are the terms of your PMI agreement for the 20% loan?

80/20 = no PMI. 100% 1 loan would have PMI. 2nds dont carry PMI, and the first doesnt look at CLTV.

Pay off the 2nd, it is most likely a balloon loan. DO IT.

 

[markgm]

Financially it usually makes sense to invest it all and keep the mortgage. Emotionally I'd want to own my house.

 

[JS80]

Originally posted by: Pale Rider

Originally posted by: JS80
Mortgage = tax advantageous. Don't pay the mortgage.

Owning your home = greater advantage.

You = fail at finance

 

[bsobel]

Originally posted by: jaha2000
80% has a 6.25 interest rate.
20% has a 8.45 or something interest rate, plus its on a ballon...
To me its a no brainer, pay off the 20%, keep the 80% for the tax writeoff and invest the rest, aka, roth, CD's ect...
I dont have PMI... thats what 80/20 does for you...
Being that as i make good money i know its not smart to have my whole mortgage paid off, i would being paying 2 grand a year on my income taxes even claiming zero (been there done that)

Agree with the plan to pay off the second then. I'd keep the primary mortgage and invest the rest.

 

[jaha2000]

Originally posted by: markgm
Financially it usually makes sense to invest it all and keep the mortgage. Emotionally I'd want to own my house.

I think the tax benefits outweigh the emotion...
The other side is that if i really got into a bind and had to pay my house off for whatever reason i could, to me its not any different than owning it.

Just wanted to make sure i was not out in left field with what i was thinking.

 

[DisgruntledVirus]

Pay off my debt?

 

[JS80]

Originally posted by: jaha2000
80% has a 6.25 interest rate.
20% has a 8.45 or something interest rate, plus its on a ballon...
To me its a no brainer, pay off the 20%, keep the 80% for the tax writeoff and invest the rest, aka, roth, CD's ect...
I dont have PMI... thats what 80/20 does for you...
Being that as i make good money i know its not smart to have my whole mortgage paid off, i would being paying 2 grand a year on my income taxes even claiming zero (been there done that)

Pay the 20 off, keep the 80, max roth each year, I wouldn't CD ladder yet keep in liquid high yield savings, and incrementally enter the market as the advisor recommend allocation (i.e. I think stock market will fall further).

 

[kranky]

Originally posted by: JS80

Originally posted by: Pale Rider

Originally posted by: JS80
Mortgage = tax advantageous. Don't pay the mortgage.

Owning your home = greater advantage.

You = fail at finance

Nothing wrong with wanting to be debt-free. Yes, there are tax advantages to having a mortgage, but it still costs money. Even though I didn't suggest paying the mortgage off in full, I have no problem with anyone who wants to be completely out of debt. It's a personal choice.

 

[CPA]

Pay off your debt.

 

[CPA]

Originally posted by: JS80
Mortgage = tax advantageous. Don't pay the mortgage.

So take a tax advantage by paying interest? No thank you.

 

[Special K]

Originally posted by: CPA

Originally posted by: JS80
Mortgage = tax advantageous. Don't pay the mortgage.

So take a tax advantage by paying interest? No thank you.

If you can earn a greater return through investing than the tax-deducted rate of your mortgage, then financially you will come out ahead by not paying off the mortgage early.

Having said that, I can also see a psychological advantage to owning your house, and I don't think you can put a universal price on that. It's up to the individual to decide how much money that peace of mind is worth - i.e., how many lost investment dollars they would be willing to sacrifice to own their home outright.