Should we use an inheritance to pay down our current mortgage or buy a new home?
The answer to your question depends on your financial objectives. If you use the inheritance to pay down your current mortgage, you could significantly reduce the length of your loan and lower your total interest expense.
If you have a fixed rate mortgage, your monthly payment does not change but you could shave months or years off of your loan, depending on the size of the inheritance and how much you reduce your principal mortgage balance.
For example, instead of paying off your mortgage in 30 years, you may be able to pay it off in 25 years or less. That means you are eliminating years of mortgage payments, which can save you a significant amount of money.
Paying down your mortgage balance is also called mortgage acceleration. In most cases mortgage acceleration is implemented by overpaying your loan on a monthly basis but you can also achieve similar results by applying a sizeable one-time payment, such as from an inheritance, to reduce your loan balance. There should be no cost to accelerate your mortgage and it can be done at any time over the course of your loan.
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Paying down your mortgage balance tends to provide less of a financial benefit in the short term but increases your financial flexibility in the long term. For example, eliminating your mortgage payments in the future may enable you to retire sooner.
Now that you understand the benefits of paying down your mortgage you can compare that option to using your inheritance to buy a new home. If you buy a new home, you can use the inheritance funds as a down payment or to reduce your mortgage amount.
The inheritance may enable you to afford to buy a new home while keeping your current home. In this scenario, you need to demonstrate the ability to afford the monthly mortgage payment, property tax and homeowners insurance on two homes, but the inheritance may help make this financially feasible.
Use ourHOW MUCH HOME CAN I AFFORD CALCULATORto determine what price property you can buy
If you sell your current home you only need to qualify for the mortgage on your new home and you can use the proceeds from the sale as well as the inheritance toward the purchase price of your new home.
Another factor to keep in mind is current mortgage rates compared to the rate on your existing mortgage, if you decide to keep your home. If current mortgage rates are high then you may want to use the inheritance to minimize the loan on the new home. In other words, use the inheritance to make a bigger down payment which reduces the mortgage you need to buy the home.
If current mortgage rates are low, you may want to consider a larger mortgage for your new home and use some of the inheritance proceeds to pay down the existing mortgage on your current home.
The table below shows current mortgage rates and fees for leading lenders in your area. Reviewing these loan terms enables you to understand the mortgage and home you can afford. This information should help you decide the best way to spend your inheritance.
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