Windfall - Put it toward Mortgage or Education Fund??

[sh118]

DH received an inheritance from his grandfather and we are trying to figure out what to do with it.  The idea is to either put the majority of it toward our mortgage (rate is just over 6%), or start a pretty good sized college fund for DD (she's only 2).  We have another child on the way, so would probably split it at that time.  

I am leaning toward paying down the mortgage, just because I expect the economy to keep getting worse in the next few years, and while DH has a stable job, it may get iffy if they have a couple "less than great" years.  The need for a college fund seems so far away, and we would expect DD to help pay for her education.  

DH is leaning toward doing the saving/education fund.  In the back of my mind I worry a little about the security of that investment if our monetary system fails (I am always looking on the dire side!)

Any good advice or links to sites that would help us decide what to do?  I know we are blessed to have this situation right now, but we plan to continue living the way we have always lived and not blow this on splurges, etc.! 

[TiredX2]

Well, before I could make any recommendations (or a decision myself in the same situation), I'd need a lot more information:

1) Are you saving for retirement?  Are you maxing both you and DH's contributions each  year?

2) Do you have an emergency fund?

3) Do you have any large purchases on the horizon?

4) Will paying down your mortgage have tax implications for *you*?

5) Do you have any other non-mortgage debt?

[A&A]

My vote:  Put it toward the house. 

[sunnysandiegan]

The questions above are important, as is the dollar amount of the inheritance for comparison purposes. It is relative in terms of earning potential and debts. What is the inheritance amount in terms of monthly family income? One month's worth or one year's worth makes a big difference, for example. Would the inheritance pay off any debts?

Ultimately, I'd split the inheritance between debt and savings...versus all of it in one or the other. The percentage or dollar amount to each would depend upon your family's bigger financial picture. The most "lopsided" I would go is an 80/20 split in either direction. I'd lean more towards 60/40, though, in either direction (specifics dependent).

Also, check into the prepayment terms of your mortgage. Some lenders have strict policies and others are open. You might incur a penalty for paying a lump sum towards the mortgage, but could avoid that by paying up to "x" amount extra each month towards principal (until the inheritance amount is used).

In addition, there are some folks who are concerned about how their children's college funds are set up. All money in the child's name is expected to go towards the child's education, for example, when applying for financial aid last I checked. Money in the parents' name(s) is only counted "against" the child at certain percentages. Tax-sheltered investments can alter the effects to a certain degree.

IMO, fear isn't a good place to begin making decisions. It is good to recognize it (fear) and approach it as healthy and an indicator for "need more information". One's relationship with money is more important than how much one has or doesn't have, in my experience (which is years of education and working with people and their money).

One wise course of action is to deposit the money into a interest-earning, insured account until you can do the proper research. If you have a Costco membership, they offer bonuses for two accounts via Capital One banking and one Sharebuilder investment account. ING Direct offers an online savings account for a decent (for this financial climate) interest rate. If you search online for high rates on online savings accounts, be sure to research the "bank" before sending any money. The ones I mentioned are legitimate and have solid reputations. There are other good ones, too. And, unfortunately, there are plenty of non-legitimate places, as well.

[SundayCrepes]

People who enter retirement with a paid off mortgage fair much better than people still paying their mortgage. AND your kids can always take out a loan for school, but you can't take out a loan for retirement. EVERYTHING I've read about financial planning says YOUR retirement takes priority over your kids' education.

So, make sure you have an emergency fund, preferably enough to cover 6 months of expenses and healthcare costs (in case a lack of income is medically related) and pay towards the house. Once the house is paid off you can always put away for your kids' education.

Can you refinance for a lower interest rate? They're around 4% now.

Also, I own rental property which essentially means I am a business owner. As a business owner I can hire folks to perform necessary procedures for my business operation. I hired my children to be models for advertising. Then, as their guardian, I chose to put their earned income into a ROTH IRA. They only earned $1,000 each (and they were gosh awful cute models.) However, since that $1,000 was invested in a ROTH at about the age of a year, they've got a LONG time for it to grow. Depending on the economy and interest rates, by the time they retire each $1,000 we invested for them will be worth $250,000 to $500,000. A pretty good return on their first income. And worth a lot more than if we'd put their earned income into a college fund. By the way, I checked with the IRS to make sure everything I described is legal and it is.

[TiredX2]

Originally Posted by SundayCrepes 

Also, I own rental property which essentially means I am a business owner. As a business owner I can hire folks to perform necessary procedures for my business operation. I hired my children to be models for advertising. Then, as their guardian, I chose to put their earned income into a ROTH IRA. They only earned $1,000 each (and they were gosh awful cute models.) However, since that $1,000 was invested in a ROTH at about the age of a year, they've got a LONG time for it to grow. Depending on the economy and interest rates, by the time they retire each $1,000 we invested for them will be worth $250,000 to $500,000. A pretty good return on their first income. And worth a lot more than if we'd put their earned income into a college fund. By the way, I checked with the IRS to make sure everything I described is legal and it is.

Can I ask where you opened their Roth IRAs?  How were the fees?  DD has babysitting money and I'd love to get her a Roth.  When I tried through Vanguard last year, though, they said she was too young.   TIA

[SundayCrepes]

Originally Posted by TiredX2 

Can I ask where you opened their Roth IRAs?  How were the fees?  DD has babysitting money and I'd love to get her a Roth.  When I tried through Vanguard last year, though, they said she was too young.   TIA

We have USAA so we set up through them. They have a minimum $250. Many places have a minimum $1,000. Initially I was told they were too young and I said the IRS said I could do it so they went ahead and set them up.

[lmonter]

OP, I'm with you, I'm not all that trusting of current economies.  I'd pay off the mortgage (if hubby and I got an inheritance, we'd finish off zero-ing out the student loans, maybe keep a little on hand for emergencies or a little fun splurge, and the mortgage).  Then, hey, you've freed up our biggest money-making and wealth-building asset - your salary!  Then you can *really* sock away money for emergencies, college funds (even if it's in gold or silver form - a lady near me apparently went and paid for her brand new car with gold bars, I wish I could've seen that), whatever.  Then when/if there's lean times, you won't have to worry as much about how on earth you're going to keep a roof over your heads.

Custodial accounts for investing...  different states have different regulations.  The tax stuff is usually attached to the child's SSN, but the guardian makes the decisions on it.  In some states, like Nevada, the guardian doesn't have to turn over the investment portfolio until the minor is 21yo.  In other states it's 18yo.  In my case, that was a good thing (that my parents opened the account in NV) because of the situation I was in at that age...  it wasn't good, and I would've just blown it all.  Anyway, you just need to find a good investment person that'll help explain everything to you.  :)

[cappuccinosmom]

If you have no other debt and emergency fund, I'd go with the mortgage. 

And then the money you've been putting on the house, start putting in to an education fund.  It'll pile up, and *you'll* get the interest, rather than a bank. :)  And you also won't lose the house if you run into some bad years when you can't make those "payments" to the edcuation fund.

[SleeplessMommy]

If you put down less than 20% when you purchased the house, you probably are paying mortgage insurance premiums. (PMI) There is a HUGE savings going forward if you recast or refinance the mortgage to get rid of the mortgage insurance. Call your mortgage holder and ask for details.

After that, I would go with a college fund for the kids. We go with a 529 plan (I think) and there is a way to get the money out if you really, really need it.

[sh118]

Thanks for all the input.  A little more info.  The inheritance is close to a years worth of income for us.  We have about a years worth of income in a savings account as well, and have no debt other than the house.  Both of our cars were purchased (used) in the last couple years and we don't plan on replacing them for several years.  We've made a lump sum payment on the mortgage before without penalty, but I will have to check on that again, and see if the amount is restricted. 

What I'm thinking makes sense is to pay down the mortgage and still contribute small amounts to an education fund yearly, and then when the mortgage is gone we will be able to save up more. 

As far as retirement, DH is maxing his 401k, I am not contributing, but was maxing mine out while working (until 2 years ago).  Mine has tanked and lost a lot of value.  We also have a couple small IRA's that have been losing money ever since we started them.  Because of my worries about the economy, I'm not liking the investment route and wanting to go toward a tangible, paid for, asset =).

[JudiAU]

I would pay off your mortgage first. Your children can always take for loans which can then help them pay off. You cannot finance your retirement. One way to frame it for DH is that you will continue to pay the "mortgage" expense/commitment even after it is paid off directed towards education. My mom always did that when she had a bill that ended, like a car payment.

[lilyka]

First how much of your mortgage would this cover.  6% sounds like an outrageous interest rate.  If this would pay off most of it I would just go with it.  if you will still have quite a bit i would refinance at a lower rate, use your lump sum for closing cost.  you can take the money you were paying on your house (much of which is interest and PMI and crap that builds no value) each month and apply it towards savings.

[weliveintheforest]

With your update, I'd definitely go with paying down the mortgage.  

[mattemma04]

I would pay on the mortgage principal.

[aeterna]

Originally Posted by sh118 

Thanks for all the input.  A little more info.  The inheritance is close to a years worth of income for us.  We have about a years worth of income in a savings account as well, and have no debt other than the house.  Both of our cars were purchased (used) in the last couple years and we don't plan on replacing them for several years.  We've made a lump sum payment on the mortgage before without penalty, but I will have to check on that again, and see if the amount is restricted. 

What I'm thinking makes sense is to pay down the mortgage and still contribute small amounts to an education fund yearly, and then when the mortgage is gone we will be able to save up more. 

As far as retirement, DH is maxing his 401k, I am not contributing, but was maxing mine out while working (until 2 years ago).  Mine has tanked and lost a lot of value.  We also have a couple small IRA's that have been losing money ever since we started them.  Because of my worries about the economy, I'm not liking the investment route and wanting to go toward a tangible, paid for, asset =).

....good for you guys! I think we're doing all right for ourselves but I am inspired by stories like yours. Keep on striving, right? =)

I also would have gone for the mortgage. I look at finances like I look at the emergency oxygen masks on airplanes - you gotta put yours on first, so you're still conscious to help other people. ;) When your kids are grown - and you own your house free and clear! - you can put the mortgage payments towards their schooling.

[Carson]

Originally Posted by aeterna 

....good for you guys! I think we're doing all right for ourselves but I am inspired by stories like yours. Keep on striving, right? =)

I also would have gone for the mortgage. I look at finances like I look at the emergency oxygen masks on airplanes - you gotta put yours on first, so you're still conscious to help other people. ;) When your kids are grown - and you own your house free and clear! - you can put the mortgage payments towards their schooling.

This is what we plan on doing, focusing on paying down our mge now so we can use those payments to help kids out a bit in the future.  The only self-criticism I have of the plan though is that of compounding interest.  Who knows what inflation will do, but even if it stays around 3-4%, the mortgage payment will be worth roughly half as much in 18 years.  So I'm currently trying to figure out some way to contribute a little bit annually to something relatively low-risk while still meeting our personal goal of paying down that mge.