Should you pay off a mortgage if you come into a large amount of money?

Recently I came across a question on an investment website. What should you do if you come into a large sum of money? Should you pay off your mortgage or invest it?

As you might expect, the advice ranged from pay the mortgage off to keep the mortgage and invest the money; from mortgage rates are low so you should be able to get a higher return on invested capital to the extreme of invest the money and refinance your mortgage; and either pull equity out to invest or shorten the remaining term to get it paid off quicker.

Not knowing the person’s circumstance, my general response would almost always be to pay the mortgage off.

Sure, I have heard the arguments about mortgage money being cheap, you can reinvest the money for a higher return and you get to keep the difference. In theory that makes sense. However, the tradeoff is the interest rate you pay the mortgage company is guaranteed interest to them and the money you invest has no guaranteed return. Therefore, your investments may or may not do better than the interest rate you are paying the mortgage company. And I have yet to find an investment that pays a guaranteed rate of return that matches the life of the mortgage and exceeds the mortgage interest you are paying by at least 2%.

Then there is the argument that you are losing the valuable tax deduction. Wait a minute! Would somebody please explain to me how spending $1,000 in interest to save maybe $250 on my taxes is a good deal for me?

If you like the idea of investing the money and keeping the mortgage in place, here is my suggestion to you: go ahead and pay the mortgage off. Then take what used to be your old monthly mortgage payments and put that money into a low-cost index mutual fund every month. You will be taking advantage of dollar cost averaging and just might be surprised of how quickly your account balance builds back up to your old mortgage balance. With this approach, you get to have your cake and eat it too!

Brian Fricke

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