To pay, or not to pay off a mortgage
by Duane J. Silbernagel
I was asked this question by a client of mine this week, and thought it’d be very relevant to giving some general guidance and ideas. How do you go about evaluating whether it makes sense to pay off the house, or invest?
First, one needs to analyze internally the comfort level of paying off the mortgage. If one has to have absolute certainty in their life, maybe paying the mortgage off is the best bet. Why? Money and mortgage payments are simply math problems. If one needs absolute certainty (which you cannot get in the markets), pay off the mortgage. In doing this, you know – for certain – that monthly obligation is gone. You can quantify with accuracy, how much money that “saved” you in the long run (it’s saving you the interest rate you’re currently paying). Money saved is just as good as money earned (the bank will not discriminate).
If this doesn’t describe you, you’ll want to start analyzing the opportunity cost. If I invested the money today, what after-tax returns can I potentially get compared that to the interest rate you’re currently paying. Make sure you factor in any tax deduction you receive on your mortgage interest, if applicable to your personal situation. Also keep in mind that investing in securities involves risk and the potential to lose money.
There are some mortgage specifics that come into play also: Do you have a pre-payment penalty? Are you paying mortgage insurance?
Other points to consider are as varied as each person(s) individual situation:
* What are the household dynamics?
* Do you have an emergency fund established?
* Do you have children going to college that you were planning on helping? If so, what’s been done to prepare for this?
* Do you have other debts (credit cards, car loans, etc) with higher interest rates? If so, maybe you look at paying those off first.
* Do you have the discipline to actually invest the funds?
How long do you plan to live in the home?
* Do you have the discipline to use the funds (saved or otherwise) constructively?
* What insurances do you have in place? Disability, Life, Long-Term Care insurance policies are put into place to cover a specific risk that could happen to you. A review of the insurance portfolio is necessary in this scenario also.
What is the solution? The answers will vary as the plethora of individual factors play in.
As a financial advisor, I’m a firm believer in Occam’s Razor (maybe it’s my civil engineering background). If you’re not familiar with Occam’s Razor, it essentially states:
when multiple outcomes exist, the simplest one, is correct.
In the end there will likely be a scenario that makes the most sense for you.
If you’d like to find out more about me, have an idea you’d like me to write about or would simply like to contact me, visit my website: www.duane.wrfa.com.
Thank you for reading.
Duane J. Silbernagel
Waddell & Reed, Lincoln City
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Waddell & Reed does not provide legal or tax advice. Please consult with a professional regarding your personal situation.
Duane Silbernagel is a Financial Advisor in Lincoln City, Oregon offering securities through Waddell & Reed, Inc., Member FINRA and SIPC. Insurance products are offered through insurance companies with which Waddell & Reed has sales agreements. He can be reached at (541) 614-1322, via email at DSilbernagel@wradvisors.com.
Waddell& Reed is not affiliated with www.newslincolncounty.com website and is not responsible for any other content posted to this website.