I've come into a large amount of money. Should I invest it or pay off my mortgage?
There's no easy answer to your question, but I'll try. From a purely financial standpoint, I can make a pretty strong case that mortgage is "good debt" (as opposed to bad debt like auto loans, credit cards, etc). If you have a good interest rate on your mortgage (4.5% or less), the bar isn't very high for doing better with a diversified investment portfolio. If you can earn more than the interest rate on your portfolio, you'll be ahead financially. And, that doesn't include any benefit you may get if you are able to deduct the mortgage interest. However, by paying off the mortgage, you are effectively "guaranteeing" the 4.5% (the rate used in my example) rate of return. There are no investments that can "guarantee" you that rate of return. Odds are, that over the long term, you will earn more in a properly diversified portfolio, but there are no guarantees. You can think of it like this; paying off your mortgage is like a CD, the return is guaranteed. Investing the funds involves a higher degree of risk, but also a higher potential return on your funds. Finally, a big part of the decision is emotional. I can't place a monetary value of the "warm and fuzzy feeling" that you may get from not having a mortgage.
I’ll give you my favorite answer, "it depends". Here’s the reason why. From a “quantitative” stand point (goals that can be objective and measured), are all your bases covered when it comes to having emergency liquidity? If you already have a financial plan, which option will measurably get you closer to your retirement goals, if you’re not retired already. Is paying off the mortgage more of a “qualitative” option (dealing with attitude and emotions)? Some clients hate the idea of debt hanging over their head, even though it’s necessary debt (i.e. mortgage loans, auto loans). The fact that paying off your mortgage may make an individual sleep better at night doesn’t necessarily mean that it’s the best option when it relates to their overall financial plan. So, this leads me back to my answer, “it depends”. My advice, if you haven’t sat down with a financial planner, sit with one and identify your short and long-term goals, and see which options give your large windfall the most leverage as it pertains to your goals. Once you have all the objective information, you’ll be in a better position to make a decision, be it qualitative or quantitative.
That is hard to answer without more facts regarding your circumstances. For example, do you have significant savings already or is this all the money you have? If you already have saved for retirement, for a rainy-day fund, children's education, etc., you may want to use these funds to pay off your mortgage. Having a mortgage paid off can give you a great sense of security and accomplishment. That is worth a lot. If you haven't yet saved enough for retirement, you should work with a financial advisor (or do the analysis yourself online) to determine how much you need to save for retirement and put some or all of this lump sum towards retirement savings, in which case you will need to determine how to do so as tax-efficiently as possible. Same with any other financial goals you may have.
One thing I like to point out is that if you typically invest in a mix of fixed-income and equities, you should consider paying off the mortgage as your fixed income investment. You save the interest instead of earn it from bonds. And there is no risk, fixed income does have risks, especially in the current environment. If you invest 75% in equities and 25% in fixed income, consider putting 25% towards the mortgage and 100% of the rest in equities. The interest you save on the mortgage will be roughly equivalent to the interest you would have received from investing in bonds. You will also want to consider the tax savings from the mortgage interest deduction.
The bottom line is, you will need to analyze it a bit to determine what is best for you. I hope these questions and suggestions help you in making your decision.
There is no obvious answer. It all depends on your specific situation and your tolerance for investment risk.
From a pure economics standpoint, if you think that the after-tax return that you expect to earn from investing your new sum of money is higher than the after tax cost of the mortgage, then it makes sense to invest the funds rather than to pay off the mortgage. That's the theory.
In practice,you should consider where you stand on the financial life cycle. No matter what the economics, if you are close to retiring, getting rid of your debts should be a higher priority than if you are in your thirties for example. Additionally, managing funds requires investment skills and temperament that many people do not have. You also need a bit of luck. Going back in time a bit, if you were asking this question in November 2007 and had decided to invest, no matter what your level of investment skills, you would have quickly regretted not paying off the mortgage.
There is a risk with investing the funds that you do not incur by paying off the mortgage. Your level of risk tolerance matters. I hope this helps.
How about both? Invest in a portfolio of stocks that pay a dividend and have historically increased their dividend over time. Receive the dividends as cash and use the added income to pay extra on your mortgage, or reduce your out of pocket mortgage expenses. In the end, you will have a paid off home AND a nice portfolio.