The correct answer is "it depends" because this question involves the classic economic principle of opportunity cost. This means that when you decide to do one thing (e.g., pay off the mortgage), you forgo the opportunity to do another (e.g., invest the inherited funds). In this case, there are several deciding factors. One is your investment risk tolerance. If you are a very conservative investor, you may not earn more on your investments than the rate of interest that you are paying on the mortgage. In fact, you could earn less, even accounting for the tax deduction on home mortgage interest. In this case, it might be wise to pay off your mortgage and, even before that, pay off any outstanding credit card balances.
If, on the other hand, you are at least a moderately aggressive investor, you might earn a higher return than your current after-tax mortgage interest rate by investing your inherited money, especially if it will be left alone for some time to grow. History tells us that investments become less risky if they are held for longer periods of time. Thus, another key factor to consider in determining your best course of action is your investment goals. You might also decide to do a little of both: that is, use some of the inheritance to prepay principal and invest the rest.
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