Financial Gurus...

[ATI]

I'm asking this for my cousin who approached me with it because I'm in mortgage and frankly, I didn't have an answer, so I'm turning to the green screen for answers.

He has $80K left on his mortgage (5.375% interest rate) and has $110,000.00 in savings. His parents are going to send him his share (roughly $190K) as soon as a house they own is sold, but that's a couple of year in the future.

He and his wife want to buy a bigger home, what he wants to know is;

should he use his savings money ($110K) now to payoff their current house or wait for the big money, combine both funds and put down a large down payment on a new house to bring their monthly mortgage payments down to very affordable and then rent their current home and collect rent?

1. Payoff current mortgage now and be debt free and start saving, then wait for the large inheritance?
or
2. Keep funds and combine with inheritance money and use as large down payment on a new home to have low monthly mortgage?


Thanks!

[bowhntrmatt]

To me, depends on what his investment and tax bills are.

If he cant make more than the 5.4% on that money if invested, then might as well pay off mortgage. Also, if the new big standard deduction is what he is going to take on his tax return, that mortgage interest deduction doesn’t matter.
Other problem with paying off house is it makes him less liquid when he wants to move on. He’s tied down until that house sells.

[ATI]

To me, depends on what his investment and tax bills are.

If he cant make more than the 5.4% on that money if invested, then might as well pay off mortgage. Also, if the new big standard deduction is what he is going to take on his tax return, that mortgage interest deduction doesn’t matter.
Other problem with paying off house is it makes him less liquid when he wants to move on. He’s tied down until that house sells.

he plans on keeping and renting their current home which will bring about $1500 per month in rent.

[STGS]

#1 every time.

[EastTexasMan]

3) Take it to Vegas and play $100 a hand blackjack or let it ride on Black

[tmurray]

#1 and he should have done a refi about 5 years ago to cut that interest rate in half. Doesn't really matter now though if he's gonna choose option 1.

[Charles]

Fast Car and Faster Women.

[Shane]

If he plans to spend at least $80K of his current savings money in 2 years or less on a new house, then I'd recommend #1 - assuming the $30K he'd have remaining would be sufficient for emergency funds for them and they're not planning any other large purchases between now and then. If he keeps the money rather than paying off the mortgage, he might be able to invest the money for 2 years and earn more than 5.375% on it, but that would require investing in things that fluctuate in value right now. I don't like to have money that is gonna be spent in less than 3-5 years fluctuating in stocks or similar investments, as they might be worth less in 2 years than they're worth today. Maybe not likely, but possible. Keep it stable. CDs and other low risk type investments aren't paying anywhere close to 5.375% now, so he'd probably be better off paying off the loan and stopping the interest charges. He could/should then also save at least the amount that he's been paying on the mortgage each month until he buys/builds the new house. He'll have a few thousand more dollars in savings, on top of the $30K, by then if he does that.

[offthemap]

Also needs to think about his debt-to-assets ratio for a new mortgage if he intends to build a big expensive home. Ultimately it will probably be a wash though.

Paying off the debt of the current mortgage is probably be best route at that interest rate.

[Kdog]

Find a high dollar deer lease with big whitetails and get another with Axis deer.

Oh wait, that wasn't the question? You cannot go wrong by paying off the mortgage, my 2 cents.

[bbqfan5909]

Best thing I'd recommend is a financial planner. Having that much cash should be invested making you more money.

[Triple 7]

If he plans to spend at least $80K of his current savings money in 2 years or less on a new house, then I'd recommend #1 - assuming the $30K he'd have remaining would be sufficient for emergency funds for them and they're not planning any other large purchases between now and then. If he keeps the money rather than paying off the mortgage, he might be able to invest the money for 2 years and earn more than 5.375% on it, but that would require investing in things that fluctuate in value right now. I don't like to have money that is gonna be spent in less than 3-5 years fluctuating in stocks or similar investments, as they might be worth less in 2 years than they're worth today. Maybe not likely, but possible. Keep it stable. CDs and other low risk type investments aren't paying anywhere close to 5.375% now, so he'd probably be better off paying off the loan and stopping the interest charges. He could/should then also save at least the amount that he's been paying on the mortgage each month until he buys/builds the new house. He'll have a few thousand more dollars in savings, on top of the $30K, by then if he does that.

Shane saved me a lot of typing

[Atfulldraw]

If he plans to spend at least $80K of his current savings money in 2 years or less on a new house, then I'd recommend #1 - assuming the $30K he'd have remaining would be sufficient for emergency funds for them and they're not planning any other large purchases between now and then. If he keeps the money rather than paying off the mortgage, he might be able to invest the money for 2 years and earn more than 5.375% on it, but that would require investing in things that fluctuate in value right now. I don't like to have money that is gonna be spent in less than 3-5 years fluctuating in stocks or similar investments, as they might be worth less in 2 years than they're worth today. Maybe not likely, but possible. Keep it stable. CDs and other low risk type investments aren't paying anywhere close to 5.375% now, so he'd probably be better off paying off the loan and stopping the interest charges. He could/should then also save at least the amount that he's been paying on the mortgage each month until he buys/builds the new house. He'll have a few thousand more dollars in savings, on top of the $30K, by then if he does that.

Too long, didn’t read, but knowing who said it...I probably agree.

[CRM_95]

3) Take it to Vegas and play $100 a hand blackjack or let it ride on Black

This.

[yaqui]

Yea, with over 100,000 grand in a savings account, he needs a financial planner working for him.