I just inherited $150,000 and my husband and I can’t decide what to do with the money. Our situation is that we both work and our salaries more than cover all of our living expenses. We each have a 401(k) Plan and some savings accounts. We are debt free except for our home. Our current mortgage is about $140,000 at about 4.5 percent. We plan to work another 10 to 15 years. When we retire, we each will have a pension. What I want to do with the money is to pay off our mortgage. I would love to have a paid-off house. My husband doesn’t feel the need to be mortgage free; rather, he thinks we should invest the money. We’ve decided that since it is my inheritance, I will make the final decision; however, I would like to give my husband some good reasons other than it makes me feel good to pay off the mortgage. That is where I need your help. Can you give me some good financial reasons to pay off our home?
First, let me say I think comfort is definitely something that should be factored into the equation. After all, when you take a step back and think about it, the purpose of money is to have comfort. When you have the resources, you can afford some of the “luxuries” of life that make life easier. Therefore, no one should dismiss comfort as a legitimate use of money. In fact, I think comfort is extremely important in making investment decisions. I always tell investors that it is important for them to be comfortable with any investment they invest in. After all, if you make an investment and that investment keeps you up at night, as far as I’m concerned, no matter what the return is, it’s not an appropriate investment for you.
In discussing the situation with your husband, the first thing I would talk about would be the economics. In your situation, when you pay off your mortgage, you’re getting a guaranteed four and one-half percent on your money. Four and one-half percent is not a great rate of return; however, it is significantly better than rates of return on CDs, money market accounts and U.S. treasuries. In addition, by paying off your mortgage, it is a risk-free investment in the fact that you know the exact rate of return you’re receiving and market conditions will not affect your return. Obviously, if you invest in stocks either individually or through mutual funds, we all know there is risk involved.
I would also discuss with your husband the fact that paying off the mortgage doesn’t mean you can’t add to your investment portfolio. What I would recommend you propose to your husband is that each month, you invest the money you would have used to pay your monthly mortgage payment. If you do that, by the time you retire in 10 to 15 years, you would have accumulated a nice size portfolio.
If your husband mentions that by paying off the mortgage you would lose out on tax write-offs, you can tell him that is not the case. In looking at the numbers you have provided me, whether you pay off the mortgage or not, this year you will more likely than not take the standard deduction. The standard deduction would actually provide you with a larger deduction than if you itemized. Therefore, you can tell your husband that there’s absolutely no tax disadvantage by paying off the mortgage.
Being debt free can provide many people with peace of mind, and although you can’t measure that in dollars and cents, it’s a good feeling and it will take some weight off your shoulders.
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