Ask Terry Questions Pay off/down mortgage versus equity loan versus college loan

Pay off/down mortgage versus equity loan versus college loan

By Terry Savage on March 10, 2015 | Financial Planning / Retirement

My mother recently passed away and I am preparing to sell her house (her only asset) and will stand to gain about $350,000.00 from the sale. My husband and I have negligible investments and savings. Our monthly income is $9000.00 and our expenses are $7000.00 with the excess earmarked for long term expenses. We currently owe $300,000.00 on our mortgage (30 year with fixed 4% interest), $150,000.00 on our equity loan (3% variable interest) and $20,000.00 on college loans (4% fixed). We are both retired. Our home is currently worth about $2,000,000.00. I am worried about our home not being paid off and would like to pay off the mortgage, but my husband is more concerned about the variable interest on the equity loan. What loan would be most prudent to pay off or down with the proceeds of the sale? We would prefer to have about $50,000.00 in cash after paying off the loan(s) for emergencies and pleasure.

Thank you.

Terry Says:  Well, let’s split the difference several ways.  I would definitely and immediately pay off the home equity loan — because it could get very expensive if rates start to rise.  And how is it possible that you retired without paying off student loans? I’m assuming that you co-signed for loans with your children.  I would pay them off asap — and if you re relieving your children of this burden they should be very grateful.

The balance of your money could go into savings/investments — done conservatively.  You are unlikely to get a windfall like this again.  You haven’t proved that you are very good savers — so don’t dig into this cash unless absolutely necessary.   Then add an extra $1,000 per month — or more — to pay down your mortgage loan even faster.  Or take a hunk of the money — say $50,000 — and prepay a portion of your loan.  It’s good to have liquidity — though there is nothing like the feeling of being mortgage-free in retirement — if you’re planning to stay in this home.

And one more possibility:  you didn’t say whether you have or need life insurance.  But if there is a need for life insurance (for example, if the income would mostly stop at his death) you might want to buy a combo life/LongTerm Care insurance policy to cover the most expensive of unexpected expenses that could come along to disrupt your retirement plans.

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