Paying off the mortgage
A coworker asked me an interesting question: if he were to receive an inheritance equal in amount to the outstanding balance on his mortgage, should he use it to pay off his mortgage? My advice was no, unless he has a mortgage with a high interest rate, which surprised him.
It certainly would feel good to not have any debt, but he would end up converting his liquid cash into an fixed asset. Any number of events that could happen which would make it difficult to sell his house or get a home equity loan, turning his inheritance into a rock. To give a few examples:
1. He could lose his job — no bank will give a home equity loan to someone who is unemployed.
2. The house could be taken over by fungus or other natural disaster not covered by insurance. A few years ago this would have sounded like a bad science fiction movie, but I’ve seen houses for sale whose interior wall cavities were covered with green gunk.
3. A credit meltdown, such as the one currently causing our economy to gridlock. Nobody would have guessed this a year ago in the era of “liquidity”, but now even people with perfect credit can’t get loans and houses are sitting on the market until they go stale.
Instead, I suggested that he put the money in a high interest bearing account or brokerage account and pay off the mortgage at a faster rate. That way he would have cash on hand (or close at hand) and still be able to erase his debt when he pleased.
