Mortgage Payoff – When & Why? David E. Hultstrom, MBA, CFP

Outline 1.Clarifying the Question 2.The Math Part 3.The Human Part 4.Observations & Examples

Clarifying the Question A mortgage is simply an investment opportunity Doesn’t affect real estate exposure It’s an asset allocation question The mortgage is a short bond position

The Math Part Example: –Client has $1,000,000 portfolio invested 60/40 (stocks/bonds) –Client also has a $200,000 mortgage –The client is actually $600,000 in equities and $400,000 long in bonds and $200,000 short in bonds. –The actual NET allocation is $600,000 stocks and $200,000 bonds or 75/25!

The Math Part (cont.) Don’t confuse risky with risk-free returns The impact of taxes –Federal –State Compared to treasuries –Risk free return –Similar duration

The Human Part Debt free! Yet higher perceived volatility Could go either way –More likely to stay the course –Less likely to stay the course Propensity to save the payment

Observations and Examples A conflict of interest Taxable funds only Assumes they have a bond allocation Example: –A condo at 9.75% –CPA’s advice –My advice –Netted about 7% a year

David Hultstrom, MBA, CFP Financial Architects, LLC Contact Information