I had a Minnesota client call me last week. The reason for the phone call was the client’s sudden financial windfall.
The client’s mother-in-law died a couple of months ago. The estate had settled and the couple’s part of the inheritance was almost the same amount of money as the mortgage balance on their current home.
I congratulated the client on the fact that his current home mortgage was as low as it was. With the recent housing bubble, and subsequent bust, low home mortgage balances are rare indeed.
I also knew that his client has put three kids through college over the last few years.
The client asked me if he should pay off the mortgage on his home with his wife’s inheritance from her mother. He did not really need the income now because he was still working.
I asked my client the questions below in order to help him better determine what his investment options should be with his financial windfall.
What is the interest rate on your current home mortgage? The answer was 6%.
How many years are left on your current mortgage? The answer was about 10 years.
What is your current state and federal tax bracket? The answer was about 40%.
What is the current interest rate on a AAA rated corporate bond that matures in ten years? I told my client that the answer was 3.55%.
Are you concerned about losing the mortgage interest deduction on your annual tax returns? My client said that his remaining home mortgage balance and his tax bracket did not provide him much of an income tax return deduction.
That last question that I asked my client was if he would rather pay interest at 6% or get interest at 3.55%? The client answered that he would rather pay off the debt at the higher interest rate.
Using the answers to these questions, my client was able to determine how best to use his financial inheritance. He decided to pay off his current home mortgage and lose his 6% debt payments.
The answer to the question of paying off a home mortgage is simple. All you have to know is what questions to ask yourself. Pay attention to the answers and get out your calculator.
Ric Lager
Lager & Company, Inc.
