If I have $500k windfall, am I better to pay my home loan in full or invest the money?

Assume that I have a 30 yr P&I home loan at 6.5% for $500,000. If I have $500,000, am I better to pay the loan off and invest the monthly payment I would have been making or to invest the full $500k and just pay the loan out over 30 years. I guess assume my investment rate is the exact same (6.5%).

I am trying to get a handle on what to do with my finances and I am not sure how to analyze what is the better solution (please disregard any tax breaks on the home loan, I can factor that in later).

Thanks.

So far you have been getting some pretty good answers. However it is really a matter of personal balance sheet management. Your home, regardless of ownership should appreciate at 3-4% a year ( national avg.) weather you own it or finance it. The debt expense net of tax deductibility of mortage interest is going to be approx. 4%. That means you have a 2.5% yield improvement on whatever amount of the 500,000 you decide to finance. The avoidance of certain costs such as PMI insurance and other potential loan service costs may limit your financing to 75-80% of value. Household income also plays a role in determining net debt expense. But there is no doubt that using your 6.5% loan and investment return figures you will grow your personal balance sheet (net worth) more by financing the max allowable to avoid PMI expense. If you invest the money in a well diversified blend of bonds, CDs, dividend producing equities and a small (10-20%) in growth investments you should be able to beat the 6.5% number for investment returns. Also your primary residence is a real estate investment you can fully leverage and not share the equity appreciation with the lender. I am a Financial Consultant. Visit my home page at www.sivelasset.com for contact info.

Invest the money. Your debt service on the mortgage is tax deductible and furthermore your early payoff will not grow as would (in theory) an investment account.

I would do both. I would double my mortgage payments each month. Based on your scenario 6.5% and 500,000 loan amount you should have your loan paid off in less than 9 years if you double your monthly p&i payment. With the other 250k or so i would speak with a few different financial advisors and see what they can come up with as far as with plans for pumping that cash into a medium to low risk investment.

I like DK's answer but it depends. The risk that you have to take to gain more then 6.5% on your money might seem like a lot to you. Anytime you buy a business or invest in the stock market you might lose all your money at anytime, traditionally no you probably won't but there is still risk.

My answer is this. Weigh the comfort of owning your home and having no mortgage bill to pay vs. the potential money you might make and the risks you have to take to earn that money.

DK's answer is mathmatically correct but he is not you and doesn't know what would make you feel better.

i think you should pay your home loan because buy your own home is also an investment.

I would pay off the house. If you calculate the interest you are paying over the life of the loan. (it comes to around 600,000.00) Your 500,000.00 investment in paying off you house is going to save you the 600,000.00 in interest you would pay over the life of the loan.

To be totally honest with you..I would pay off my house first so that I always have a stable home to depend on. Otherwise, there's the intererst. Then I would take the regular payments I would have made and use it as investments.

Or you could split the 500k - 300k for the house and 200k for investment/ 400k for the house and 100k for investments.

I would just get the house out of the way that way u have more money to use freely in other ways. Also, if you are using it to build credit or maintain good payment and credit status, then take out the house loan.

If the interest rate is the same as your investment rate of return, it probably doesn't matter.

There are two aspects to this question -- pure math and emotional factors.

A lot of people would love the freedom of owning their homes outright and not having a mortgage payment, but there are other people who wouldn't care as much. You need to figure out how you feel about this. You should also consider how long you plan to live in the house. If you think you'll be there forever, it makes more sense to put extra toward the mortgage than if you'll be selling it in a few years.

If I were you, I would make sure I had an emergency fund. Then I would invest some of the money and use some of the money to pay down the mortgage.

I'm assuming you have everything else totally under control (maxing retirement accounts, emergency fund, short term savings set aside for other goals). If you don't, then make sure all that is in order first.

Then consider whether or not you're planning to remain in this house. If you think you may move in a few years, don't pay off the whole mortgage. Just invest the money and reevaluate your finances when you move.

OK, assuming you do want to stay in the home indefinitly and that all your other finances are in order, the third thing that matters is how close you are to retirement. If your income will drop/disappear in a matter of years, then you should aim to have the home paid off by then. This will minimize your monthly expenditures and give you peace of mind.

If you are far from retirement and have everything else in order, I'd start paying extra on the home but I wouldn't pay the mortgage off all at once. Invest two thirds of the money however you otherwise would and put one third of it in a high yield money market fund. Then pay your mortgage from that account. You can continue to pay the payment out of your monthly income as well and effectively double your payment each month (or not if you would rather spend the money on something else that month).

That way you get the best of both worlds. Note--if money market rates go way up you might suspend extra payments and if they drop, you might want to increase extra payments.

Invest the money.

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