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
This assumes you have **more** disposable income than your *financial commitments*, for the duration of your mortgage. I.E. on a [$400,000 mortgage at %4.5, you’ll owe 2,223.33 every month for the next 25 years](https://www.calculator.net/mortgage-payoff-calculator.html?cloanamount=400%2C000&cloanterm=25&cinterestrate=4.5&cremainingyear=25&cremainingmonth=0&cpayoffoption=extra&cadditionalmonth=0&cadditionalyear=0&cadditionalonetime=20%2C000&type=1&x=Calculate#loanterm). You must make that + living expenses in income overall. That’s a risk susceptible to life changes:
* Family – kids on the way, wedding, divorce
* Health – injury, mental break, time off OR expenses to care for a dependent
* Repairs – House maintenance, seasonal damage, car repairs, etc
* Market – Interest rate changes,
* Employment – downsizing, relocations
General wisdom points to paying down debt [high cost credit card/car loans > low cost/mortgage]; building a reserve fund; and taking advantage of incentives [stock/retirement matching, etc]. Reducing expenses & having a reserve fund will make your family more resilient to downturns, and position you to be ready and able to take advantage of opportunities when they come knocking.
Another thought – follow the money: The bank thinks it is a sounds, savvy investment to earn $266,998.97 over 25 years on your choice to get a mortgage. Paying down your mortgage faster minimizes that massive life-long expense out of your pocket. While you’re investing small amounts at 6%/year, the bank will be cashing 4.5%/year on a LARGE amount. The only way out of the LARGE payments to the bank, is paying down principal sooner. This frees up disposable income to invest as you see fit.
Consider simulating the scenarios yourself! Enter a few values into the calculator link above, and see how the situation can change. A one-time gift of $20,000 applied to your mortgage can shave off 2 years 2 months, and save 13% of your total interest costs. OR you could keep the 25 year duration and get significantly lower monthly mortgage costs.
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