Imagine this scenario: you’ve just received a hefty lump sum, perhaps through an inheritance. Now comes the question: is it better to use that money to pay off your mortgage and/or debt or to invest it? The answer depends on several factors, according to Financial Advisor Jason Andrew with OFS Financial Services. “Everybody is different,” he says. “There is not a cookie-cutter solution that everyone fits into. When it comes to financial planning, we believe in and operate with a philosophy of tailoring strategies to meet each individual’s specific needs.”
Andrew, who is a part of the Olympia Federal Savings family, works with community members and small businesses to pursue their investment goals. In the scenario above, he looks at interest rates, what type of debt a client is carrying, their risk tolerance and their long-term goals.
In some cases, retaining the money and investing it is the better option. Mortgage interest rates have dropped significantly since the 1980s when loans at 12% to 14% were common. Today, rates are closer to 4%. If clients find an investment that pays 4.5% to 5% each month, they can use that money to make their mortgage payments while keeping the main funds intact. “Now you have the liquidity of the money in case you need it,” Andrew explains, “whereas if you put it into the mortgage, you’ve locked it away and don’t have access to it if other needs or opportunities arise.”
As an example, if a client has $300,000 in bonds and a $1,500 monthly mortgage payment, the bond dividends will pay the mortgage. “They can use the extra amount for other living expenses and that $300,000 stays right around that range,” Andrew says.
On the other end of the spectrum, some clients are locked into mortgages with higher interest rates and unable to refinance. Others might be dealing with credit card debt. “If you have a 7% loan or you can’t find something on the investment side that will get you that rate of return, it makes sense to pay off the mortgage,” Andrew maintains. “You’re not getting as much on your investments as the outflow on the loan interest payments.”
He recalls one couple who had credit card debt of approximately $60,000 at a 22% interest rate, and $50,000 left to pay on their mortgage at 6.5%. When they came into money, the reasonable choice was for them to pay off the credit card and loan. “They were able to get through all of their debt and no longer have that lingering over them,” Andrew says. “They hated debt, to begin with, but had gotten stuck. It was a perfect way for them to be able to start fresh on the savings and investment side using the money that was once allocated for their high-interest debt payments.”
Once clients are debt-free, Andrew advises them to take the same amount they would usually spend on their mortgage and invest it rather than spend it. “It’s really hard for people to do, but that’s what we recommend,” he explains. “If you had a $1,200 mortgage payment, try to set $1,200 aside to save and build your investment pool as opposed to having additional spending.”
He explains the concept of Dollar Cost Averaging, a strategy where investors divide the total amount to be invested across periodic purchases of a target asset and make automatic payments, regardless of what the market is doing. This reduces the market volatility on the overall purchase. “It evens out the ride,” says Andrew. “If I’ve got $500, that money is going into an investment on the fifth of every month, no matter what the price point.”
Andrew also clarifies the different investment options available to clients, especially those who may be new to the market. “With stocks, you’re buying a piece of ownership in a specific company,” he notes, “whereas if you buy a mutual fund, you’re purchasing shares of a fund that are comprised of a diverse number of stocks. Some mutual funds are designed by industry or business sector. For example, if you’re looking at mutual funds with large-cap stocks [i.e., stocks in companies with a market value of more than $10 billion] then they are going to be comprised of stocks from companies such as Walmart and Boeing and the kind of companies that are in the S&P 500. Other mutual funds are designed around risk tolerance or investment time horizons (i.e. when you plan to retire). With mutual funds you’re getting the benefits of investment diversification along with a low-barrier entry to a professionally managed portfolio of securities.”
The type of investment Andrew recommends depends on the risk tolerance, goals and objectives of each individual client. “For some who are retired, their primary goal may be capital preservation, while others who are younger and saving for the future might be more growth focused. Each person requires a customized plan to meet his or her best interests,” he says.
For anyone debating about whether to pay off a mortgage or invest, Andrew recommends scheduling a complimentary, no obligation review, where he can provide comprehensive assessment and layout the options available to them. To schedule an appointment, you can call 360.596.9788 or email Jason.andrew@ofsinvest.com. Learn more by visiting the OFS Financial Services website.
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Located at: 303 Cleveland Ave SE, Suite 201, Tumwater, WA 98501 • 360.596.9788
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