I respectfully strongly disagree! I have to ask what are you thinking?
Ask yourself would you go out and borrow $200,000 to invest in the stock market? I hope your answer is no! As great as the market has been doing there are no guarentees that a war won't break out in the middle east and drive oil to $150 a barrel. You know what that would do to the market? My point is the stok market is very fragile. Putting your inheritance into the market when you have $200k of debt is no different.
Take the money and pay off your mortgage! I don't care what he interest rate is. It is debt! Every time I came into money- bonus, inheritance, tax return, whatever I spent a little then at first paid off all debt after that I built the retirement pile. Ask yourself how would it feel if you didnt have a mortgage payment?
If the money is in your hand wouldn't there also be a temptation to buy some toys? Ive observed many friends who came into money always find a way to spend it.
Sounds like you have been doing well...keep up the good work!
Oh great. A Ramseyite.
Okay, I can't speak for BF, but I'll tell you what I was thinking. I use 2 tools: math and risk analysis.
Basically their interest rate is around 2%, after the tax deduction is taken. The stock market has historically gained around 10%/year on average (a little less if you're just talking large caps, like the SP500). Yes, there's risk in the market. Always has been, always will be. That's why it pays more -- risk pays.
Now the OP's mortgage is a new one, refinanced in November. This means that under the new, more stringent lending rules, the bank considers them a good risk to make payments. Note also that the OP is on track to pay it off before they retire. Is there a risk that something bad will happen and they won't be able to pay it off? Maybe. Depends on how well they're insured, whether their EF is sufficient, etc. Again, I point out that the bank thinks they're a good risk. Now if they throw the entire windfall into the mortgage, does their risk still exist? Yes! The windfall is not enough to pay off the mortgage! It's true that the debt is smaller, but it's still there! So tell me: if all debt is bad, why take out any mortgage at all?
Now let's look at some other factors. The OP has a 15-year mortgage and is on track to pay it off by retirement. They're also late to the personal finance game. I'd guess that from this information, they're in their late 40s/early 50s. They may be behind the curve in saving, but doing a nice job in catching up if she's maxing out the Simple IRA (contribution limit to a Simple IRA in 2013 is $13K) and IRAs. It's hard to tell, since she doesn't say what the value of their retirement accounts is. We do know the value of their non-retirement accounts is $70K.
Anyway, given the risks involved on both the mortgage and the market, it makes sense to use cheap money to boost their potential gains. Is there a chance the market could tank? Or course! But if their asset allocation is right, that risk is mitigated. The real unknown is the value of their retirement accounts, which would affect their risk profile. If it's big enough, they'll have a long enough time horizon to recover from any market downturn.
Edit: note too, that the mortgage is a hedge against inflation. As prices rise, the mortgage payment takes up a smaller and smaller percentage of income as the years go by. In the meantime, the investments continue to go up as returns compound.
Oh, and what happens if, in 15 years, they have a house paid off but not enough saved to retire? Following your methods, that's a real possibility.