What to do with an inheritance?

[wildmonkeys]

Sadly, my husband lost his father last year and his mother several years before.  We recently received our portion of the estate (he is one of several siblings) and we have had it in our checking account for several months because we don't know what to do with it...

Here is our financial background. We have three kids - the oldest will start college in 7 years.

We own our house, but have a large mortgage payment because of the real estate costs in the area we live - there are several expensive home improvements that would make sense ie finishing the basement, getting a new deck, etc.

We paid cash for our cars both of which have about 50,000 miles on them.

We have done a decent job of saving for retirement.

We have no debt other than our mortgage and have saved some though not nearly what we will need to pay for our kids to go to college (esp if they go out of state or to a private college)

Prior to receiving this money we had a 6 month emergency fund.

I make some money each year doing freelance, but plan to have a pt job starting a year from next fall when my youngest begins kinder. 

Thanks if you are still reading - what would you do with inherited money in this sort of situation? Save for retirement or college? Or make a home improvement? It seems stupid to have it sitting in our checking account.

[cristina47454]

The adage goes something like this, "You can borrow for college, but you can't borrow for retirement". It's wonderful that you are in such a sound financial position. ANd it sounds like you are taking your time figuring out what to do.  I'd be interested to hear other advice, don't have too much time this morning to compose a thoughtful reply, I've got two little ones running around my feet!

[moneymama]

Here's what I would do - I would pay down the mortgage and have it re-cast, saving you money every month for the life of the loan.  Not only will you likely save hundreds of dollars in interest each month, you'll have a smaller payment which will give you a leg up on all of your other goals (retirement, college, etc).  

A re-cast is when the mortgage company (for a small fee - $200 or so) recalculates the mortgage after a lump sum has been paid to it.  It spreads the new balance over the same period, making your payments smaller. 

As for the kids college fund, there are many ways to go for low to no money, and considering the massive education debt problem our country has right now, it is worth investigating these.  Check out Debt Free U - an awesome book on how to get a debt-free education without help from your parents.

[heatherdeg]

I would only recast if you're in the first 10 years of a 30 year mortgage.  Otherwise, recasting means that they take the remaining balance and restart the clock at a 30 year term.  If you can get them to recast over the existing remaining term (so let's say you're on year 11 of a 30 year and therefore have 19 years left, if you could make a lump sum payment and recast over 19--or even 20--years) which is not a traditional recast.  But these are questions you may want to ask.

If the improvements you'd be making on the house would improve the property value and bring it up to the playing field of your neighborhood because your house is outdated in a way that makes it the crappiest house in the 'hood--then yeah, I would probably do that before recasting the loan.  In fact, I would spend the $200-$300 to have a licensed appraiser come in to do an appraisal for you personally and talk to them about exactly what would increase the value and to what amount.  That would be money well spent.

I wouldn't invest in the kids college funds.  There are too many other things to do.

And after all of that, I would start researching the options to invest in something that will provide passive income.  Hey--if all your financial ducks are pretty much in a row, you have a golden opportunity.  Our family's goal is to replace dh's income from his job with passive income (money you earn without going to a job) in the next 15 years. It's a very aggressive goal, but it would supply us with retirement income in addition to whatever else.  How you invest your money to make that happen will depend on a number of things--including your comfort level with the different options.  If you read "Rich Dad, Poor Dad" (that book with that title--not the countless others in the series) it will help you understand this mental shift to making your money work for you vs. you working for the money.

[momct]

You can recast without resetting the term of the loan.Wells Fargo will let you recast without a fee any time you have $5000 or more to put in.

[moneymama]

yes, recasts do not start the term over, generally.

I would not improve the home to increase the value.  This does not help you toward any of your stated goals - though it may increase your enjoyment of the home, which does have value. Housing prices are STILL falling according to all metrics - though I suppose they are a bit more stable in the DC-area than elsewhere.

By paying down your mortgage you reduce an expense (interest) so you have additional income to use for other goals.  Well -good luck and let us know what you decide.

[sunnysandiegan]

Do you like your house? Do you have plans to stay there awhile? How you handle the mortgage and/or home improvements would greatly depend on your housing plans over the next few years, IMO.

My risk tolerance is fairly high, so I would have moved that money awhile ago. I would divide it, giving some to a few priorities in varying degrees. First, for me, would be retirement...max out any IRAs and/or 401k. Second, would be the house...so many options and they largely depend on future plans. Third, I would invest the majority.

Depending on how much money you received, it may be wise to talk to a professional.

[JudiAU]

Fund your retirement first. Pay off some of your house debt next. Consider making the home improvements you want as the "fun" You have a lot of options for college funding.

[wildmonkeys]

Thanks all! That makes so much sense about retirement - we just aren't sure about the best way to invest for retirement outside of work 401ks.

The comment about bring the house up to the neighborhood is a good one - our house is 22 years old in a large neighborhood (probably about 750) houses and only a handful don't have finished basements - we will take a real hit if we try to sell this house with the basement unfinished.  We only bought the house a couple of years ago - waaaay below market (like $100,000) because it was a fixer upper and we did the major repairs ourselves - we also brought a fair amount of equity because it is our third house (bought them all low and lived in them for several years while we fixed them) I actually don't want to pay off this house ever - I know it sounds weird, but we like to write off the interest on our taxes and we only plan to be here for another 15 years and then when all of the kids are out of school we will downsize and hopefully move to a lower col area. That being said our current mortgage rate is 5.25 and your posts have made me think that maybe I should look into a refinance - lowering our mortgage payment a few hundred dollars a month would be a huge help...

So what would you put retirement money in outside of a 401k - like a Roth or reg IRA?

[HappyMommy2]

I have read that keeping a mortgage just to save the taxes doesn't actually make any financial sense.  You are wasting more money on interest than you are saving on taxes. 

[wildmonkeys]

That is probably true about the taxes.  I guess the bigger issue is that we only want to live here for 15 more years and we would have to give up saving in so many other areas to pay off the mortgage that quickly.  We keep paying to build equity with the point of having enough equity to buy something smaller and in a less expensive area when we don't have kids at home.  We won't need the full equity from this house to buy a small rowhouse or condo. Does that make sense?