Should I Pay Off My House Mortgage or Invest the Extra Money?

Hey guys! It’s Justin Goodbread, CERTIFIED
FINANCIAL PLANNER™, one of the owners of Heritage Investors with a motorcycle at my
back, and I can’t hear a thing I’m saying right now…..bringing you this “Client Question
of the Week.” So I was sitting at coffee with one of our clients, and he and I – a good
friend of mine – were talking back and forth, and he made the question, “Justin, should
I pay my house off or invest?” Simple question. What had happened is he had just received
a pay raise at work, and he was trying to figure out which made the most sense. Consequently,
I was looking at the same scenario. Would it make more sense for me personally to apply
more of my income toward my house OR invest more of my income? So first, it’s not a simple
solution. There’s two things we have to deal with – one is financial, one is emotional.
So let’s deal with the black and white first, the calculation or the finance. There’s a
couple of things we have to consider. We have to consider tax bracket. We have to consider
return on investment, time frame, and our risk tolerance. Let’s say I have a 30 year
mortgage. I have a 4% interest rate. You know, most Americans get a tax deduction from the
interest on our mortgage through itemized deductions. So if a 4% interest rate is what
the APR is on our mortgage, more than likely, the effect is like 3.5%. If I compare a 5%
after-tax investment account, in other words, an investment account that earns 5% then I
pay taxes on the earnings, to a 3.5% after-tax mortgage, it is very possible that I could
be losing money by investing versus paying off my mortgage. Conversely, if I’m looking
at a 10% return after tax on that, the mortgage could cause me to loose more money. That’s
a black and white calculation. Many of our engineering clients love to deal with that.
I heard a statement last week which said, “Money is cheap; freedom is priceless.” And
that has been stuck in my head as I dug through this calculation. How much liberty, or how
would I feel if I had no debt? That’s not a question that anybody can answer. Some people,
when they look at this conundrum of should I pay my house off or invest, look purely
black and white. And God bless you if you do that. Others look at purely emotion, and
God bless you if you do that. I’m in the middle. I’m a CFP® looking at this going, “Man, I
don’t know.” Part of me says, “I love the idea of being debt-free.” Love it. Imagine
the freedom you would have. But the other side of me says, “Do I use the logic and my
training to build more wealth?” Hence, the conundrum. So I’m going to answer the question
of, “Should I pay my house off or invest?” with it depends. It depends on your age. It
depends on your time frame, and it depends on your risk tolerance. It depends on the
return on the investment in which you’re investing in. And this is where a CFP® can look at
your specific situation and help you work through those emotions and logic and make
the best decision for you. Guys, this is Justin Goodbread signing off on this “Client Question
of the Week.” Make it a great day. So if you found this video helpful, like it. Give it
a thumbs up. Share the video and subscribe to us. By the way, you can also find us on
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sharing relevant and realtime information many times a week.

Paul Whisler

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