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
Personal finance is about behavior, not math. For example, the debt avalanche is mathematically superior to the debt snowball. So paying off interest based on interest rate will save money. But in the real world, the debt snowball leads to a higher chance of success and performs closer than the math would have you believe:
https://commons.lib.jmu.edu/cgi/viewcontent.cgi?article=1672&context=honors201019
Paying off your home is a risk free return. As you mention, your 6% is average over the long run, so it’s not guaranteed.
There is no right answer. Personal finance is PERSONAL. I would not pay off a 4% or lower mortgage early. But one of my best friends could not understand why you would not want to accelerate being out of debt to everyone and enjoy the freedom of being able to own your own house.
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