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
You answered your own question. The returns are theoretical, average, tentative.
How much would I have to pay you, guaranteed, in a year for you to loan me a dollar? How much would I have to pay you, theoretically, for that same dollar if there was a possibility you wouldn’t get it?
Everyone answers that question differently. Only gamblers value them equally or prefer the second. The first scenario is like paying down debt or putting money in an FDIC insured account. The second is a risky investment.
To get more into the math, not only is paying down your mortgage risk free, it’s also tax free. So if your marginal tax rate is 30% you have to divide your mortgage rate by .7 to find the minimum risk free rate of return that would be equivalent. If your mortgage is 3.5% you would have to get 5% on a savings account to break even because interest is taxable. You’d have to get a significantly higher expected rate of return on a risky equity investment to compensate you for the risk of loss.
I have a graduate degree in finance and an undergraduate degree in economics. I aggressively paid down debt my entire life and was still a millionaire by 35. (Also don’t use Motley Fool, they’re predatory.)
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