New to the board, so bear with me...

My wife and I will soon be building a new home. Later this summer, I am going to come into a rather nice sum of money following my father's death that would allow me to pay for the new home outright and still have a little left. I have heard that being completely debt-free(especially mortgage free) can be a problem, especially for kids who are trying to get assistance into college. I am just looking for a few bits of information to possibly point me in the right direction.

Thanks.

I would pay off any and all other debt first, then find a sound financial advisor to help invest that money, they would be able to make a better determination as far as what to do with it. Dru and Mynion both work as financial planners and provide valuable info, perhaps ask one of them.

Btw, some disclosure up front: I am not a certified financial planner, nor do I practice traditional financial planning. My practice is based in economics, not mathematics (financial planning), so my perspective may be different.

First off, whether you have the money in the stock market or in the home, FAFSA, which are the financial aid forms, will include them. So this is not really an issue. Currently there are only a few ways to shelter assets from FAFSA, all of which have to be completed several years prior to applying for aid.

Many many years ago, the answer would be clear: pay off the home. Back then a bank could call your mortgage due at any time, taking your home from you if you couldn't come up with the balance. Today, mortgage companies cannot do this, nor would they want to.

Being debt-free has many benefits, so definitely pay off all of your other debts first. A mortgage, however, is a good debt to have. If you do pay off the home, make sure you immediately put a home equity line of credit in place. You never know when you may need access to your equity, and you may not qualify later.

From a macroeconomic perspective, I would definitely not pay off the home, for several reasons.

First, money inside the home does nothing to affect the appreciation on the home. So really, your home will go up in value regardless. So your money is in the home and not growing. It's effectively earning 0% interest.

Second, a paid off home with no liens is a seizable asset. Meaning if you were involved in a lawsuit, or had considerable healthcare costs due to injury/illness, etc. then the home would be unprotected. A lein on a home, such as a mortgage, provides some level of protection.

Third, you have to look at your other goals and if you are adequately funding them. There may be other areas of your financial picture that require attention where the money could serve useful. For example, I have an investment account that generates a fixed amount of dividend each year, and I take that dividend and it pays for my investment-grade whole life insurance policies on my family. If I put this money into my home, my home would be paid off, but I'd have to pay for my insurance out of current cash flow.

Lastly, a good financial advisor can grow that money for you over time. It is possible that you could pay off the mortgage early, but later, and at a fraction of what it would cost you today.

By paying off the home you are eliminating the possibility of leveraging that asset. And the truly wealthy will tell you that leveraging of assets is what keeps their wealth growing significantly higher than the average investor.

Excellent comments Minion. One additional factor to consider is the sizable tax deduction that a mortgage provides...and if your kids have grown and left the nest, it may be your only deduction left. It is great letting those tax dollars sit in your account and work for you. If you have a note at 6% and get a modest 10% return, now you are keeping up with inflation by using that asset to your advantage. A bit more spread and you come out well ahead. In any case, it beats the 0% you get otherwise on your home, and keeps your asset liquid.

Having read these posts is of interest to me. COngrats to menofsteel on coming into a tidy sum, I wish you well in your home building. Thanks for the other suggestions there!

Yes, my parents found this out after they paid their house of early. They were told that it is better in some ways to finance a home they pay it off real early or buy it outright. I never really knew why though until I read the above.

If you have the opportunity to pay off your home then i would advise you to do so. Don't wait, that is something that you should get right out the way. It makes no sense to wait when you have the funds.

What if there isn't enough interest paid to claim it on
taxes? I was under the impression that if there aren't
a certain amount of deductions, interest on a mortgage
can't be claimed (i.e. someone who doesn't file a long
form).

Unless you are in the last year or two of a 30 year mortgage, you are paying a substantial amount of interest. Filing the long form will not cost you more, but it could save you money by allowing you to take this type of deduction. Another trick used by clever consumers is to alternate years on medical deductions between actual and standard. If you owe medical bills, try to lump payments into every other year to max out this deduction technique. Do you do work on the side? Do you get a 1099 or report other earned income? You should be considering expensing many things that benefit your business. Do you have term life insurance? You may be able to deduct the cost of that as well.

Find a good tax accountant by asking around. Who is getting money back vs. paying? How long have they been a client and why did they choose this accountant? A good accountant will not COST, they will SAVE you more money than they charge in most cases. By filling out the short or EZ forms, you are at the mercy of the IRS. A CPA goes to school for years, then has to pass a very stringent test to prove he knows the laws and how to apply them appropriately. Would you go to a butcher for surgery since he charges less than the doctor? Of course not. Using a professional is worth the cost.

It's a 30 year, yes... got it 3 years ago, but we're paying it off really
fast, so very many less than 27 years left. Maybe like 6 years. In any
case, there are not enough deductions to claim it... we've tried all these
three years and it's just not enough. No medical stuff, no.

And no 1099s or other income, just W2 income. No term life insurance.

>Would you go to a butcher for surgery since he charges less than the >doctor? Of course not. Using a professional is worth the cost.[/quote]

This has nothing to do with cost. We just don't have enough
deductions in a year's time.