Invest or Pay Extra Towards Mortgage?

Updated on October 09, 2012
A.D. asks from Arlington, TX
19 answers

My mom just passed away and I am inheriting half of her investment account, it was divided up into different mutual funds earning her 1.9% and 3.2% interest. I found out today that I cannot open an account like hers because my half is $15K and they require $50K for that type of investment account. So they said I need to open a Brokerage Account at a regular bank.

That got me to thinking about CD's, and they all pay under 2%.

Which got me to thinking more.......why invest money to make 1.5% when my mortgage lender is charging me 6.5% ?!?!?!?

It makes sense to me to just put that 15K straight to my mortgage, but I want some input before I mention this to my family.

***In January I made a lump sum payment of 10K on my mortgage and according to Bank of America it took 4 years and 2 months of payments off of what I now owe (I went from 16 years to now 12 years left)

Thanks in advance for your financial advice!!!

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answers from Dallas on

Save some for an emergency if you don't already have an emergency fund and then pay on the mortgage. Just think how much you are making by not paying interest (all the money you save on those payments). Once the home is paid off you can invest more with less worry.

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answers from Springfield on

If you already have an emergency fund, good retirement, college fund, etc, I would probably use it to pay down the mortgage.

But I do have to ask, 6.5%? I'd talk to a local bank or credit union about a refinance. We were paying 6.75%, I think, and are now paying 3.5%. We locked in our rate in April, and I think if we'd waited it would be even lower. We had 26 years left on our mortgage, and we now have a 15 year mortgage with approximately the same payment.

Seriously, it's really something you want to consider.

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answers from Boston on

Depends on where you are with your other long-term savings goals and debts. Mortgage debt is "good" debt and under current tax rules, you can deduct that interest. If you have credit card debt, pay that off. Beyond that, how are your retirement and college savings accounts doing? $15K would be a nice infusion of cash into either of those savings goals. Check on the taxability of the inheritance - it's a small amount so taxes probably aren't an issue but you should make sure in case.

You could max out an IRA for both you and your husband with a $10K contribution this year ($5K each) and then deposit the rest in 2013. You could also put the whole amount or part in a 529 plan for college. Both types of investments provide tax advantages and offer a wide variety of investments that should yield returns much higher than what your mother was earning. Her earnings were appropriate for someone of her age while your age and savings goals will enable you to take more risk and get higher returns.

Only if you have maxed out your retirement and college savings would I pay down the mortgage.

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answers from Washington DC on

Why are you still paying 6.5% for your mortgage?! Refinance, now!! And put the money right into your home. Last year we went from a 30 year to a 15 year and our monthly payment is actually less than it was before. I'm assuming you have NO other debt (credit cards, car payments) because if you do, that comes first. But you are right, putting money into your mortgage shaves years off of it.

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answers from Charlotte on

A., talk to your tax accountant. According to how much money you make, your home interest tax deduction needs to be taken into consideration before making the decision.

I agree with the others that you should renegotiate your loan.


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answers from Washington DC on

Follow Dave Ramsey's baby steps and you'll be golden.

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answers from St. Louis on

If this money is gravy, in other words you have additional savings for an emergency then pay down your mortgage. You are correct you will lose 5% by saving it.

The only way it would not be a no brainer is if you don't have savings, well enough to handle an emergency. Think about what the cost to refinance or pull equity out of your house is. Obviously if you had to go through 5,000 in closing costs you didn't save anything paying down your mortgage.

Of course, depending on what your credit looks like you may want to refinance into a 10 year mortgage. They are floating in the twos right now. Pretty much what I am saying is with the interest savings you could cut two more years off of the mortgage and lower your payment and have more of your payment go to principle. Then put the money down and you cut your mortgage down to 7 or 8 years!

Oh, and if you do that leave B of A, they are the devil!

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answers from Dallas on

Remember to put about $4,000 away for the tax. Then pay off credit cards. Next I would put the $11,000 in a bank savings account and try to refinance your mortgage into a 15-year note at 3% or less. Then maybe use part of the $11 for closing costs. I would save it as an emergency fund.

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answers from New York on

Do you have an emergency fund? If yes, then I would take the money and pay down on the mortgage.

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answers from Norfolk on

Use the money to refinance your mortgage to a lower interest rate.
We did last year and went from %6.5 to %4.25.
Our monthly payment is $700 less than it was before the refinance.



answers from Tyler on

I agree with everyone else in regards with what to do, but someone mentioned that mortgage interest is a tax right off. It is a tax right off right now, but that and child care credits are ending at the end of this year. Congress is talking about renewing them, but as of right now, they are ending. So, be sure you have the money to pay your taxes that you will owe as well (in other words, up your W4 or save the money in an account). If Congress does not renew these credits, we will all owe more taxes for the 2013 year.




answers from Los Angeles on

First, If you have a 6.5% morgage, RE-FI (refinance) your mortgage. I was offered a 3.25% mortgage because I have an 800+ credit score. But almost anyone can get a 4% or less interest on a mortgage.

After that, it depends on how much you can earn with the $15,000 vrs how big your mortgage percentage is. There are many stocks that pay dividends that are higher than 6.5%. I have my wife's IRA in AGNC which pays a14.45% dividend as of right now.

Good luck to you and yours.



answers from Dallas on

No one has asked, but are you planning to stay in the house forever? At least until you retire? If yes, then pay it off. As the others mentioned, pay off other debt first, then set up emergency fund, then college saving funds for the kids, make sure you have term life insurance (and not variable-according to Suze Orman), THEN pay off the mortgage. And definitely, refi.

And I don't know what kind of investment account you are referring to, but there are other discount brokerage houses, (Fidelity, Schwab) that do not have minimums to open...Check around. I'm sure 10K is plenty minimum for them.



answers from New York on

I work in finance managing investments. Unless you really don't want that money for 20 years, I'd pay down the mortgage. It's very possible over time you'd outearn that 6.5% (that is tax deductible so your effective rate is lower) but there is risk and I'm conservative so if you can't get a better mortgage rate, I'd pay it down in a heartbeat. There's no guarantee what the stock market will do and it's very difficult to earn 6.5% in the fixed income markets now without also taking on risk.



answers from Denver on

Yes, I think you are correct. If you could find an investment that earned more than your mortgage the smart thing to do would be to invest. Or, you could figure out which stocks are going to take off soon :) Have you looked into re-financing? Rates are pretty low right now and you could use some of that money for the closing costs on your mortgage. We were at a 4.99% rate and re-financed in January to a 3.25% rate, saving tons of money.



answers from El Paso on

Always go toward the mortgage. :)


answers from Dallas on

You're spot on. Put it towards your mortgage. Otherwise you're losing money.

Or, find a better mutual fund. There ARE mutual funds out there that can earn your 10-12% on average. Just gotta find them.


answers from Dallas on

6.5% on a mortgage? You know the mortgage rates are down? We are currently refinancing again to lower that 3.5 %. We thought just under 4% a few yrs ago was great. Look into a no cost refi and pay down. Our refi is less than $500 total with perfect credit.

Our payment goes down $115/month and you can't rent a quality 1 bedroom apt for what our mortgage is on our 4000+ SF house. Our payment is less than $1000 a month. We don't do escrow, we pay our own taxes and insurance.

If course, if you have other outstanding debt, clear that out, then make sure you have an emergency fund ( preferably 6 month stash minimum)

Then invest. Many accounts don't have a $50,000 minimum, many do have a $10,000 minimum.

If you are new to investing, don't jump in without knowing what you are doing. At least get some guidance.

Add to your children's college funds as well.

Good luck



answers from Dallas on

I agree with the others, if you are at a stable place in your life with emergency funds, insurance, retirement then go with the poster who loves teaching math! We have a 5.5 percent mortgage and saw about refinancing in April. The lowest rates have to go for the highest number of years you want to finance for, the 12 years you have left won't get you a great rate (and that's even with perfect credit). It would have been 3 K to refinance for us and so we took the 3 grand and threw it at the mortgage and it had the same effect without all the hassle and paperwork. Right now, puting it to debt you have is more effective than putting it in the bank. Sorry about your mom. I know she would be happy she was helping her child!

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