By JLP | April 27, 2007
I saw this little article in the May 2007 issue of Money and had to share it with you because it is related to all my mortgage posts. Unfortunately, there’s no link available so I’ll have to tell you what it is about. On page 40B of the May issue of Money there is a column called “the mole,” which is written by an anonymous financial planner. In this particular column he says:
“Recently I was talking to a client of mine who has a second mortgage at 8%. As we went over his investment options, I suggested something he had never heard before: He should pay down his mortgage.
“Most financial planners would rather memorize actuarial tables than have you pay off a mortgage. They’ll say, ‘An 8% mortgage costs you only about 6% after your interest deduction. I can do better than that in the stock market.’ Well, yes, perhaps it’s true, but the stock market isn’t a sure thing. Paying off your mortgage is. A fairer comparison would be putting your money in risk-free Treasuries. Sure, paying off an 8% mortgage really means a return of around 6% after taxes, but Treasuries pay just 4.6% or so (around 3.5% after taxes).
He then goes on to say that the main reason planners don’t suggest paying off mortgages early is that it would mean that they (the planner) would make less money since they are typically paid a percentage of your invested assets. Assets used to pay down a mortgage would mean less assets for the planner to manage, which means less income for them.
If this were true, wouldn’t these same planners recommend that their clients NOT pay off their credit cards? I don’t know of any financial planner who would recommend that a client NOT pay off their credit cards. I realize that most clients aren’t going to have mortgage-size credit card debt. I think most planners would look at this as more an issue of what’s the best way to allocate your resources than they would worry about losing out on assets under managment. I mean, shouldn’t a planner’s responsibility be to help their clients grow their net worth? This means making decisions based on the known facts and weighing that against the possible outcomes. Sure, some people will be more comfortable paying off the mortgage quickly. Others may want to put it off as long as possible. I think it should be between the planner and the client to make that distinction.