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
Cash management. In my situation, I realized a few years ago that I would be able to pay off my mortgage a little over a year early by adding about 20% to the payments. This will free up a large amount of cash each month, just when my twin daughters will be starting college. If they need help, I will have available cash. If they don’t need help, I’ll be able to invest.
A lot of folks have said this part in different ways, because it’s key to answering the question. The mortgage payments are fixed in amount, frequency, and duration. Ending that obligation gives me the option to invest the cash in equities, to hold it as cash, or to make capital improvements to the house.
That’s why I put my “pay off mortgage” money into 1Y Tbills at 5.1%
Will keep doing that until tbill rates drop below my mortgage rate then re-assess.
DotCom bubble. I lost a ton of money in the dotcom crash and decided that acres that you own will still be acres no matter what happens to the economy but shares that you own might not be worth the paper they’re not written on.
This implies that you own acres for the purpose of enjoying acres. (Because the resale value will go down with everything else) If your sole purpose in life is to make money, good luck to you. Just hope we don’t hit a financial apocalypse.
The thing you’re missing is the degree of volatility. The 6% average isn’t jiggling between 5% and 7%, it’s swinging between -2% and 14%. You’re looking at a pretty 1.5% spread but there’s big risk and stress hiden beneath the single number.
I have a 5% mortgage. I routinely beat 5% in all of my investment vehicles. I would pay off my house tomorrow if I had the money.
I absolutely understand that from a purely mathematical perspective, it’s the wrong decision. However, there is a level of immediate financial freedom and real security that comes with owning your own house and being out of major debt. Knowing that if something crazy happened, and my wife or I were out of work for an extended time, we’d still be able to stay in our home – that counts for a lot.
Read The Truth About Money by Ric Edelman.
I assume you are saying that you’d pay extra down on your mortgage and why not invest instead. If you have the discipline to invest what you would be paying down, then yes it is better to invest. Some people feel better not having debt at all, so for them it’s better to pay down early.
Really simple: one is a guaranteed return. It is a pretty amazing feeling living completely debt free.
This is the rent vs buy dilemma. Probably if you rent and invest the difference, you end up ahead in the long term. However, the peace of mind of having your place sometimes is better for some people, also most people aren’t disciplined enough to rent and invest the difference religiously, if you have a mortgage you pretty much have to pay.
Let’s say your interest payment per month is an even $1000. That’s $33, each day. Always there, always adding to the mortgage payment. Every day.
Unless your market activity earns $12,000 annually, the money you’re investing isn’t doing a thing for your mortgage.Meanwhile, the daily interest on the mortgage continues to accumulate.
Aggressive payments on the principal lower what the mortgage is costing you. In time, the daily interest isn’t so gross and then you’ve got more resources available for investing.
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