By Kevin Boutwell, CFP®, CIMA®
As a high-net-worth investor, you want to ensure that you’re getting the most out of your assets and that they are working for you in return. You don’t want to leave it sitting in a savings or checking account where you’re earning a very low percent interest rate. Usually people end up doing one of two things—paying down their mortgage or investing. It can be a difficult decision to make, so let’s look at the pros of each.
What Makes the Most Financial Sense?
When deciding between these two options, you first want to know which option can provide the greatest payoff. In this case, it’s your mortgage rate versus your expected investment return. You can calculate some rough estimates to evaluate which decision would make more financial sense.
Let’s consider an example. Say your mortgage interest rate is 5%. If you estimate that, based on your risk tolerance and time horizon, you can expect an investment return of 4%, it would make more sense to pay down your mortgage. Otherwise, you’re potentially throwing away 1%. However, if you are an aggressive investor and believe you could earn 8% on your investment, it would make more sense to invest.
This may sound simple on paper, but there are a lot of factors at play. And as we all know, even the best of predictions aren’t set in stone. It’s important to run a thorough analysis and factor in taxes on investments, mortgage interest deductions, and risk, among other elements of your financial life. An experienced wealth advisor can run all of the calculations and do a complete analysis of your unique situation.
The Pros and Cons of Each Option
There are some pros and cons to each that go beyond the raw math. Liquidity is one big pro for investing. You’ll have easier access to it in case of an emergency. However, if you put the money towards your mortgage, it’s gone, for all intents and purposes. The only way to get the money back out is to sell your house or refinance your mortgage.
However, an advantage of paying down your mortgage is that your house will be paid off sooner. You will have a greater chance of being able to enter retirement without a mortgage, or at least have your mortgage paid off sooner during retirement. That way you can free up more of your money before your medical expenses start to build. If you invest, your mortgage will be another bill you have to pay while in retirement.
Another advantage of paying off your mortgage is that you could then use the equity you’ve built in your home for other financial gains. For example, you could do a cash-out refinance and either increase the value of your home through home improvements or use that cash to buy another property to grow your real estate portfolio. This could be a strategic option as house prices decrease (although also consider rising interest rates as you refinance).
How We Can Help
This is just a general overview of how the decision process works; there are several other factors to consider before you make a decision and take action. At Veracity Capital, our mission is to help you make smart decisions about your money. Specializing in serving high-net-worth individuals, I’ve worked with a number of clients facing decisions like this one. To learn more about how we can help you calculate the best return on your money in your specific situation, I encourage you to contact me today for a no-obligation get-acquainted meeting. Reach out to me at 678.888.4952 or email@example.com to get started.
Kevin Boutwell is a wealth advisor and partner at Veracity Capital. With almost a decade of experience in the financial industry, Kevin has acquired expertise in managing equity compensation and retirement planning. He focuses his services on corporate executives and people transitioning to retirement who have complicated compensation packages and resulting tax headaches. He believes that proper financial planning drives the best investment decisions, and his customized process and strategies help his clients achieve better outcomes. Kevin prioritizes building long-term relationships and offers the perfect mix of analysis, problem-solving, and a personal touch so his clients can focus on what’s important while knowing their finances are taken care of.
Kevin is a highly decorated veteran former U.S. Navy pilot. He got his start in the financial industry at Goldman Sachs and holds the CERTIFIED FINANCIAL PLANNER™ and Certified Investment Analyst® designations. Kevin earned his Bachelor of Science in Mechanical Engineering from the Georgia Institute of Technology and an MBA from Indiana University’s Kelley School of Business. Out of the office, you can find Kevin staying busy with his family, including his young triplet sons. When he has a spare moment, he enjoys staying active with CrossFit and an occasional round of golf. To learn more about Kevin, connect with him on LinkedIn.
Advisory services offered through Veracity Capital, LLC, a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.