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
First, I think it’s helpful to point out that there is a minimum payment you need to make monthly on a mortgage. If you don’t make that payment you start getting charged extra fees. So you definitely want to make that minimum payment no matter what else you invest in.
After that though, it’s better to get a better rate. If you can get a 6% return on your investment in the stock market and your mortgage is only 4.5%, feel free to put your money into the better rate!
Another angle you may not have considered is that there is an emotional aspect of debt. People often feel relieved or less stressed when they don’t owe any money. It’s also less stressful to have safer investments a lot of the time. Paying down a mortgage is safe and helps get you closer to not having debt. So it can possibly be a better choice emotionally, even if it isn’t as efficient financially. It all depends on the person.
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