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Thirty years is a long time. The typical first-time homebuyer is 33 years old, according to the National Association of Realtors (NAR), meaning if they get a 30-year mortgage, the end of that loan seems about a lifetime away.
Thirty years is also a career, the difference between starting out in the workforce and starting to think about retirement.
So when you’ve recovered financially from saving up for the down payment and put aside some cash for when the furnace kicks the bucket, you might start to think about paying some extra principal so you’ll be free from the bank’s clutches before you’re retired.
But is paying down that mortgage to get debt-free the best thing to do with your extra cash? Experts say there might be a better option, especially if you’ve taken advantage of the historically low mortgage and refinance rates the past few years.
“The reality is that all debt isn’t created equal,” says Aleksandr Spencer, chief investment officer of Bogart Wealth, a financial planning firm based in Virginia and Texas. “Some, like mortgages, depending on certain factors, can offer some big-time economic advantages.”
Paying off your mortgage faster shouldn’t be at the top of your financial priority list. Try to pay off higher interest debt and build an emergency fund first.
Investing that money in the stock market might earn you a better return, despite the volatility in today’s financial markets, leaving you with more money in the long run than if you just paid off the mortgage faster, experts say. It’s basic arbitrage – borrowing money at one interest rate and investing at a higher rate in return.
“With a 30-year fixed mortgage, you have 30 years to outperform the bank,” says Bruce Hyde, partner, chief compliance officer, and wealth advisor at Round Table Wealth Management, a financial advisory firm. “It’s a pretty long time and I would suggest that most people can generate a return in excess of the interest rate.”
So should you put more money on that mortgage principal or invest it instead? Here’s what some experts have to say.
How Mortgage Loans Work
A mortgage is a loan in which a bank or financial institution provides the borrower with the money to purchase real estate, with the property …….