I just got an inheritance check, should I pay off my mortgage or my credit cards first?
Answers | 5
Yes, pay off the credit cards – but that’s probably all you should do.
I see no one has told you that at today’s low interest rates it is probably much wiser to have a 30-year fixed mortgage and invest the remainder of your inheritance. Why do I say this? If you could have a 30-year fixed interest rate at 4.0% this sets the return requirement from your investments incredibly low. Keep in mind that your mortgage interest is deductible, so the “breakeven” on this is less than the 4.0% you are paying on the mortgage.
I know paying off the home is an “emotional” issue and our parents and grandparents hammered into us the idea of paying off the house before retirement. However, with today’s low interest rates, too many people incorrectly want to pay off the mortgage. This made sense in years past when interest rates were 7, 8, or 9% or higher. At those higher interest rates, it’s difficult to consistently outperform what you would be paying in interest.
In contrast, (assuming a 4.0% mortgage interest rate) if you earn 5% on your investments you have just earned an additional 1.0%+ over what you are paying on the mortgage and this means a little extra monthly spendable income. Who couldn’t use a little extra monthly income?
I hope this helps. I would be happy to answer any follow up questions you may have regarding how to best handle an inheritance.
Generally you want to pay down the credit cards. Not only will you save money on the interest that would otherwise accrue but if you currently have a high utilization ratio (% of available credit used) then your credit scores could improve when the lower balances are reported to the bureaus. That in turn, could help you in other areas (including refinancing your mortgage).
If the sum you've inherited is a large amount, you might look at using some towards credit cards and some towards your mortgage. Most mortgages will allow you to recast your loan and thereby lower your payments without refinancing. Or you can put money towards paying the balance down in a refinance and beat your rate down as well.
Bottom line: talk to a licensed loan originator who can talk you through different scenarios to set your weighted cost of capital and monthly cash flows how you want them to be.