Sep 26 2012
“Winning the lottery” is a phrase often used whenever someone suddenly finds a large amount of cash in their bank account.
A lucky few might actually win the lottery, but many more people will suddenly find a large amount of cash through other means, such as seeing their stock options explode when their company goes public, having a close relative pass away and leave them a large inheritance or receiving a large settlement for one reason or another.
Regardless of how you actually “won the lottery,” the problem remains the same:
What do you do with all of the cash?
Yes, this is a good problem to have, and yes, many people will offer to help you solve any problems you may have in the future — for some sort of fee. But most folks choose to start close to home by asking:
Should I pay off my mortgage?”
Some experts say that you should pay off your mortgage immediately. Others disagree and say you should use your mortgage debt wisely and distribute wealth in other areas. Is there a right or wrong answer?
But there are two different schools of thought.
Personal choice vs. financial choice
The single biggest reason to pay off your mortgage when you win the lottery is a personal one — peace of mind. Once your mortgage is paid off, you can sleep soundly knowing that no matter what, your home is 100 percent yours.
The financial reason to pay off your mortgage is that rather than paying the bank interest each month, you can keep that money for yourself. Sure, because mortgage rates are low, it won’t be much — but rather than paying the bank 4 percent over 30 years, it would be like earning 4 percent over that same period.
Likewise, the single biggest reason to keep your mortgage even though you have the ability to pay it off is a financial one — other investment options.
You may be able to get an effective rate of return of 4 percent by paying off your mortgage, but many other investment opportunities will pay higher than 4 percent. Stocks, bonds, muni-bonds, mutual funds, annuities and other investments could give a higher effective rate of return than if you use the cash to pay off your mortgage.
Which to choose?
And what do I suggest you do regarding your mortgage should you win the lottery?
Pay it off.
Chances are you will have a few million left over anyway and most likely won’t miss the extra dollars you could have earned by making the financial choice rather than the personal one.
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Justin McHood is America’s Mortgage Commentator and lives in the Phoenix, Arizona area. You can find Justin on Facebook, Twitter, and LinkedIn. He is happy to answer any mortgage-related questions that you may have.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.