Why would you pay down a 4.5% mortgage when you could, theoretically, receive a better return in the markets?

Question

I’ll preface this with the disclaimer I may be missing something obvious but considering these assumptions:

– a person has a mortgage (at say 4.5% today) and they choose to pay that off monthly (not interest only)

– the opportunity cost of this investment would be a conservative 6%/year in ETFs or REITs (of course this is tentative and an average over the long run)

(See for return references: https://www.fool.com/research/reits-vs-stocks/)

Why would a person choose to pay down their mortgage rather than invest in the markets? The pros of greater liquidity in the markets and greater diversification in REITs seem to make it the preferable choice?

For context, I am a 24M considering the best route to financial independence for myself and future family.

Thanks in advance.

In: Economics

Answer 1

The thing you’re missing is the degree of volatility. The 6% average isn’t jiggling between 5% and 7%, it’s swinging between -2% and 14%. You’re looking at a pretty 1.5% spread but there’s big risk and stress hiden beneath the single number.