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
Given the choice of investing 1 extra payment per year vs putting it toward the principal of a 30 year mortgage, I can see one possible reason. Time value of money.
A few extra payments toward principal in the first years of a mortgage affect the interest calculations for every payment every month for the rest of it. That shaves multiple *years* off the end of it because it reduces the interest over time so much.
If you buy now and will pay it off in 2054, but you want to retire in 2050 or before, then having it already paid off by then just because you put in a couple extra payments up front could be pretty nice. Beats having to work several more years. Likewise if you don’t think you’ll make it until then, having it paid off when your family inherits it could be nice.
You could also cover those cases with investments and life insurance. But some people might prefer to just have it already taken care of. And not have to worry about losing on their investments at that time or having lapsed or otherwise lost their insurance (due to health problems or whatever).
Personally I’m still going with investing instead, but different people have different preferences for that kind of thing.
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