6 Reasons the Rich Should Pay Off Their Mortgage

APRIL 25, 2016
James M. Dahle, MD, FACEP
4. The Ultimate Luxury Good
Many times the wealthy buy something simply because they can and they enjoy the extra bit of luxury it affords. That might mean flying first class, driving a Lexus instead of a Toyota, or carrying around a Birkin bag. A paid-off home can also be a luxury good. The wealthy simply don’t have to leverage their home in order to reach their financial goals, so they choose not to, because they can. As debt-elimination guru Dave Ramsey likes to say, “The paid-off home mortgage has taken the place of the BMW as the status symbol of choice.”

5. Deflation Protection
A fixed-rate mortgage provides inflation protection. If inflation goes up, it becomes easier and easier to pay that debt. However, a mortgage is a big risk in a deflationary scenario. All of a sudden you are paying that debt back with more and more valuable dollars, all while your income is dropping. The wealthy are likely to have better inflation protection already in place than the middle class. These may be investments such as stocks, real estate, I bonds, and TIPS. Also, the businesses that the wealthy own and the jobs they typically have are generally better inflation hedges than the less secure and less lucrative jobs Joe Average holds.

6. Lower Advisory Fees
Average Joe generally can’t afford good advice, which often isn’t available until a portfolio reaches a size of $500,000 or more. He is left to his own devices or perhaps the “advice” of a commissioned mutual fund salesman or insurance agent. A wealthy high-earner, however, often engages a fee only advisor who charges a fee, often 1% or more, of the assets under management. Every dollar invested increases those fees. But a dollar that is paid toward a mortgage does not. That has the effect of increasing the “return” on the money used to pay off your mortgage by 1%. 

Two Reasons That Don’t Matter So Much

Some advisors recommend that the wealthy pay off their mortgage because of the Pease phase-outs. These phase-outs purportedly reduce the value for high earners of all of the below-the-line, itemized deductions like state income taxes, charitable contributions, and mortgage interest. However, the actual effect of this provision of the tax code is to increase the marginal tax rate by about 1%. It doesn’t actually decrease the value of those deductions at all.

Another great reason to pay off debt, whether student loans or a mortgage, is that it increases your financial freedom and allows you to take risks and take advantage of opportunities you would not otherwise be able to do. However, this aspect really isn’t any different for high earners than for low earners.

In conclusion, whether you pay off a mortgage or invest is always an individual decision and many factors should be considered. However, all else being equal, a wealthy high-earner should be much more interested in paying off his mortgage than someone with a five figure household income.
Dr. Dahle is not an accountant, attorney, insurance agent, or financial advisor. He blogs as The White Coat Investor and is the author of the best-selling The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing.

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