$350,000 inheritance …pay off mortgage/student loans?

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My wife and I are getting an inheritance of $ 350,000. Our debts include:

$ 96,000 left on our mortgage, 29 years left. 6% interest.
$ 45,000 left on our student loans. 24 years left. 8.5% interest.

Our household income is about $ 60,000 and we are both 23 years old..

Would you recommend paying the mortgage/student loans…or keeping them for the tax advantages…

Also, what would you do as far as an investment vehicles go? (I’m not asking what you would buy, I’m asking what you’d invest the money in)

One more thing…please don’t say go to a financial planner. I’m just looking for some ideas, this isn’t my investment plan..

Thanks!

6 Comments
  1. Reply
    Bibs
    April 30, 2011 at 11:40 pm

    The interest rate on the student loans is very high, and I do not believe the interest is tax deductible. Thus I would pay off the student loans. Since the stock market is at historic lows, I suggest investing the remaining inheritance in common stocks if you are sophisticated in the selection of stocks, or select three or four mutual funds. If you know a stock broker who you trust for advice, get his suggestions as to which mutual funds you should buy. In four or five years when the stock market has pulled out of the present slump, sell some of your investments and pay back the balance on your mortgage.

  2. Reply
    I Buy And Sell Houses
    May 1, 2011 at 12:38 am

    Well, just for the record, go to a financial planner. With that amount of money, that’s what I’d do.

    OK. My quick, gut reaction without knowing some essential facts–like your tax bracket, your other deductions, your plans on having kids (and the associated costs of raising and educating them), your spouse’s income and plans for continued employment, your likelihood of keeping your job, whether you enjoy travel and entertainment, and a million other factors that should affect the answers–here goes.

    Don’t pay off your mortgage. Couple of reasons: You just got it, so there were a bunch of expenses that would be better to amortize over a longer period. At 6%, your effective expense (after tax benefit) is probably about 4%. And paying off your mortgage would convert nearly $ 100,000 of liquid funds–1/3 of the inheritance–into an illiquid asset. Especially in these uncertain times, you need to be liquid.

    Pay off your student loans. This is a slightly closer call. But the loans are a smaller chunk of cash. They’re at a higher interest rate. I’d pay them off.

    As for investments: Here’s what you might consider: Keep $ 100,000 liquid. Put it in CDs or money market funds.

    Fully fund any available retirement accounts you have.

    With the remaining funds, except for the $ 20,000 recommendation below, divide the remainder.

    Real Estate: 70%: Research real estate and buy several investment properties. You don’t have to be risky, and you don’t have to spend a huge amount. Find some properties that’ll cash flow. Buy them, then assign them to a manager. Do it hands-off. Monitor it, of course. But find decent properties that’ll cash flow and let the tenants pay down the mortgages. You’ll get some extra cash every month, and by the time you’re ready to retire they’ll be totally paid off. Or you’ll be able to sell them for a profit at some point in the future (probably 7-10 years).

    Stocks/Mutual Funds: 30%. Do your research. Then buy some good, solid, long-term investments.

    Keep some money left over for entertainment. Travel, if you enjoy that. Not a huge amount. In your situation, maybe $ 20,000 that you can spend over the next 2-3 years.

    So: Those are some ideas.

    Hope that helps.

  3. Reply
    Emily
    May 1, 2011 at 12:59 am

    Hold onto the money until the end of the tax year, you may have less than you think. Then pay off your mortgage and your student loans. Remember you will have to put money away each month for your property taxes, and then put the extra money you would have put toward your student loans and mortgage away for your future. Then buy yourself something nice or take a nice vacation (don’t go too crazy) to reward yourself for doing the responsible thing.

  4. Reply
    Mel M
    May 1, 2011 at 1:48 am

    Pay off the student loans. Your savings will be substantial. The sooner you can get rid of that debt, the better.

    The “tax benefits” you get from having a mortgage aren’t really that great when you think about how much you pay in interest over the term of the loan and when you consider how much money you can earn on investments right now.

    A good compromise between paying off your mortgage in full right now vs. keeping it and paying it the traditional way is to add money to your mortgage payment each month that is directed toward paying principal. You could also choose to make mortgage payments every two weeks instead of once a month. It’s like making an extra payment each year, and reduces your principal.

    If you pay off your mortgage, remember to set aside funds from every paycheck to cover your real estate taxes and insurance. You’ll still have to pay those expenses even when you’re house is paid for in full.

    Here’s a few links to articles about the subject:

    http://opportunitiesaplenty.com/Debt_Blog/2006/07/pay_off_your_mortgage_early.html

    http://www.getrichslowly.org/blog/2007/11/28/the-thrill-of-paying-off-a-mortgage/

    http://www.csmonitor.com/2006/0522/p13s01-wmgn.html

    You should talk with a financial planner. If you can find one that provides consulting for a fee rather than one who earns money off the investments you make with him/her.

    Hope this helps. Good luck!

  5. Reply
    Jeanne R
    May 1, 2011 at 2:35 am

    1. Pay off both the mortgage and the student loans, as well as any other debt that you may have. The tax “advantage” is still costing you interest every year. It is always better to collect interest than to pay it.

    2.Open and fund Roth IRA’s for each of you and add the maximum contribution each year. Let some of that inheritance grow tax free for the next 40 years and make you both millionaires.

    3.Growth mutual funds with good long term records (at least 10 years), both US and International funds, as well as Large, Mid, and Small Cap funds. That way you care well diversified and you don’t have too many eggs in any one basket. Besides mutual funds, consider non-traded REITs (Real Estate Investment Trusts). It has been nice to have an investment that is still making money even though the stock market has been doing badly. After all, rent still has to be paid (and collected) even when the economy is down.
    You might want to read Ready, Set, Retire by Ray Lucia. I know that you are no where close to retirement age, but it is never too early to plan and the earlier that you plan the easier it is to become truly wealthy.

  6. Reply
    debtairraid
    May 1, 2011 at 2:53 am

    Great question!

    Based on what you’ve told us, here is a rough estimate of your scenario. I assume your principle and interest payment on your house is roughly $ 575 per month (or somewhere very near that).

    Most of your payment on a 30 year note goes to interest in the first several years. You are probably putting $ 100 per month toward principle and $ 475 to interest.

    Your $ 60,000 annual income puts you in a 25% tax bracket.

    Given all that, let’s look at the numbers.

    If you are paying around $ 475 per month in interest, that’s $ 5700 per year in interest. If you itemize and deduct that interest from your income, that means you only have to pay taxes on $ 54,300 instead of $ 60,000.

    To find out how much you will save in taxes, you multiply your tax rate (25%) times the deduction ($ 5,700). By deducting your mortgage interest, you save $ 1425 in taxes.

    Now, ask yourself this question, why in the world would I want to give the bank $ 5,700 to keep from paying Uncle Sam $ 1425? If your house is paid off, you won’t get to deduct mortgage interest, but you also won’t be paying the bank $ 5,700 in interest. It’s a no brainer!

    The other thing to consider is security. A paid off mortgage means you will never face foreclosure from a mortgage company. If you were to become disabled, or lose your job, you will always have a roof over your head.

    I would pay off the student loans as well.

    Great question and good luck!!

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