Mortgage Payoff – When & Why?

Mortgage Payoff –When & Why?

David E. Hultstrom, MBA, CFP

Outline

1. Clarifying the Question2. The Math Part3. The Human Part4. 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

804-795-5500 DEH@FinancialArchitectsLLC.c

om

www.FinancialArchitectsLLC.com

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