Should we pay off our mortgage of 20,000 with our 20,000 inheritance?

Asked by Gina, Chicago Heights, IL Fri Aug 26, 2011

Should we pay off our mortgage of 20,000 with our 20,000 inheritance or should we save it for a down payment? We are planning on renting out the current home and buying a new one. How does this work, would we use our home now for collateral?

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Ronaldmtrulia, Both Buyer And Seller, United Neighbors Together, Rochester, NY
Mon Jun 3, 2013
2 votes
Ron Thomas, Agent, Fresno, CA
Fri Aug 26, 2011
Our Fathers and Grandfathers worshiped the idea of having their Mortgages paid off:
I think it was ingrained in them, maybe because of the Depression;
I remember the Snidley Whiplast cartoons where he comes out to the farm to Foreclose on the poor widow.
Little did we know how it would come around again.
But I digress:
I think you should talk to your Tax advisor about your situation:
My recomendation is that you do not want to be "cash poor"; not in this day-and-age.
You probably are not getting much of a tax deduction any more from that mortgage, so I don't think that is a consideration.
If you turn that house into a rental, you will have a lot of tax considerations, however.

I think you will have better uses for that $20K.

Good luck and may God bless
2 votes
Anna M Brocco, Agent, Williston Park, NY
Fri Aug 26, 2011
Consult with your tax professional, and or financial planner in order to determine what works best for you...
2 votes
Anthony Cava…, Agent, Jolier, IL
Fri Aug 26, 2011
Most financial advisors are probably going to tell you not to. You're writing off the mortgage interest anyways, and the value of the money is higher now than it will be in the future, so the effective remains of the $20000 you owe on the mortgage will be come less and less every day, not only because you are paying it off but because $20000 won't buy 5 or 10 years from now what you could buy with it today (since our government is on a money printing frenzy). A financial advisor would likely tell you that you're better off investing the money. I could see a strong argument for investing in hard assets, such as real estate.

However, if I was in your situation, I think I would just pay it off. Wouldn't it be nice not to have to worry about a mortgage payment? But one word of caution: Do take income taxes into consideration. Obama will want his cut of the $20000 so he can spread your wealth around for you. So make sure you have enough left to pay him at the end of the year. Talk to your accountant.
2 votes
Scott Godzyk, Agent, Manchester, NH
Fri Aug 26, 2011
Gine that depends how much you need the cash, how much you are paying for a intertest rate and how much will be needed for a down payment. You should seek advice from a financial planner or at least meet with a local and trusted loan officer, let them prequailfy you and assist you where your money is best placed.
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2 votes
Michael Cline, , Chicago, IL
Sat Aug 27, 2011

I would save that money for your down payment and in case of emergency. Refinancing a $20,000 mortgage is not a smart move. Besides, it's virtually impossible to do from a lenders standpoint because of the rules that our govt has put in place which discriminates against small loan amounts and low-income borrowers. Either pay it off or leave it alone.

With regards to your new home purchase... you would simply take out a new mortgage on the new home. Your existing home would not be used as collateral. Good luck!

1 vote
Jerry Grodes…, Agent, LOda, IL
Sat Aug 27, 2011
It all depends on how many years into your mortgage that you are. For example if you are more than 7 years into a loan, it probably does not make sense to pay it off. You would be paying on principle and not interest as much.
Then it depends if you took advantage of historically low interest rates. If you have anything lower than 5.5%, it may not make sense either. Do not refinance into a 15 year loan at today's rates... keep 30 years.
Lenders will value your rental on a percentage basis as income, when you'll buy another home. But beware, dealing with tenants is not for everyone. Not payers may cause you much anxiety.
Use your inhertitance to be liquid in this market, or as a new down payment. As always use a professional, full-time, Realtor and true Real Estate attorney in the process.
1 vote
Mack McCoy, Agent, Seattle, WA
Fri Aug 26, 2011
What's your current rate? Personally, I'd be thinking about refinancing to a 15-year because the rent I'd collect from 2028 on would be mortgage-free.

Currently, rates are about 4%. Considering that interest is presently tax-deductible, and inflation is a percent a two or three, essentially borrowing money is free. You'll be paying it off with cheaper dollars in the future.

So the earlier advice is totally valid - consult with an attorney, et cetera. But it's easier to make payments on $20,000 then it is to assemble $20,000, and if you can keep the lump sum intact and borrow more, that may turn out to be more beneficial for you.

All the best,
1 vote
Mikel DeFran…, Agent, Canton, MA
Fri Aug 26, 2011
Yes... if you have a 6% interest rate, that is like getting an instant 6% guaranteed return on your money... see another investment like that out there in today's market?
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1 vote
Suzanne Hami…, Agent, Orland Park, IL
Fri Aug 26, 2011
There could be good and bad for both. Not a bad idea renting out the home until prices increase. But, I would consult an accountant or financial advisor on all. Don't forget - you may have to pay taxes on that inheritance and you will pay money on rental income. And if you do pay off, will that money work for you. You will lose your mortgage interest, etc. If you need a good accountant, I can recommend one. Call me at 888-788-9544. Also, I have special deals for customers who work with me on buying and renting or selling. Give me a call.

Suzanne Hamilton
Independent Broker Owner
RE Marketing Consultants
1 vote
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