Using some of an inheritance to pay down a mortgage.
We are in our early 60s, retired, and plan to stay in our home as long as possible. We owe $302,725 on our mortgage, which has an adjustable rate, now at 7.4 percent. We pay $1,000 monthly minimum, which is not even covering the interest. We seem to end up spending the extra money we should have left over every month on "incidentals," but we have no other outstanding debt, monthly expenses of $3,546, and an income of $4,255. I've started to track every penny to figure out why we don't have enough to pay the interest-only amount, which is about $1,900. There is $15,627 in one annuity, and $17,795 in another. I just received an inheritance of $125,000. Our planner wants us to put it into a REIT, where my dad had the money for the past few years and did well. I want this money handy so that in nine months, when the prepayment penalty period is up, I can use it to refinance the house into a fixed-interest loan, with payments we can afford. [Our planner] says to just pay interest only forever. But that doesn't sound right to me.
M.C., via e-mail
A: For the time being, Oklahoma City-based financial analyst Eric Nelson would avoid a REIT, or Real Estate Investment Trust. Most public REITS have current yields in the low 5 percent range, which is quite a bit below their historical average of between 8 and 9 percent. Even if you are able to refinance your mortgage in nine months, it's unlikely you will lock in a rate below the current yield on the REIT. Private REITS, on the other hand, may be more difficult to liquidate if you need access to the money.
What looks better?
"I would prefer to see you use some of the inheritance money to begin paying down the balance on your mortgage once the nine-month prepayment penalty window has passed," says Mr. Nelson.
Currently, the spread between your monthly expenses and your monthly income is pretty thin. If you took approximately $100,000 from the inheritance and put it toward the home, you will probably be able to reduce your monthly expenses by $400 to $500 or more. This would potentially double the amount of monthly income not spent on expenses, which could be used for future savings.
At the same time, leaving approximately $25,000 in a secure money market account would provide you with an extra eight to 10 months of income or emergency reserves if something unexpected were to arise.
Also, you mentioned approximately $33,000 in two separate annuities. Assuming they are fixed annuities, you may consider taking some of the annual income out to further help reduce your mortgage debt. By reducing your monthly expenses and increasing your potential savings, you'll certainly take steps in the right direction toward financial independence.