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
Purely financially, I can think of two.
1. Returns on stocks, whether they be Dividends or Capital Gains, get taxed while the ‘return’ of being charged less interest on your smaller mortgage is not. So you have to factor taxes into your stock market returns which closes the gap between the two.
2. Stock market returns are volatile while your mortgage is not. If your investing for the long term, buy and hold some index ETF’s until your old and grey, then you dont care if the graph looks like a rollercoaster so long as it goes up. But if you are relying on returns to make short-medium term cashflow then the volatility matters. Investment options that have similar volatility to a mortgage usually dont perform nearly as well.
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