Life and Money With Helaine

Hi, Helaine: I recently sold my house and bought another one. I did a 20% down payment, received a decent interest rate on the mortgage, and still have funds left over from the sale. I don't want them to sit around doing nothing in my savings account, but I'm sort of undecided about what I should do.

I see two options: Is it smart to pay down my new home? Or should I invest in stock and bond market index funds? At the moment, I'm shying away from paying down the house because what if it's 2008 again and I need to default on the home? But maybe that's a wrong, shortsighted way of looking at it.

By paying down the house, I'll be saving years of interest on the loan. I'm not sure how long I'll be staying in it. I don't have any immediate plans to move elsewhere, but I'm also pretty sure I won't be there for the life of the loan. -- Mo' Mortgage or Mo' Money

Dear Mo': This is actually an easy question, and it doesn't require knowledge of the recent foreclosure crisis to answer it properly. While it often feels better to pay off a mortgage rather than put money in the stock market, the reverse is usually the case.

Over time, the stock market has offered people better returns for the long haul than real estate. (Yes, things can change, but that doesn't mean your particular home will do better.) At the same time, money put in a home is all but the definition of an illiquid investment. If you need the extra cash for any reason, there is no guarantee you will be able to get ahold of it -- the money could be literally trapped in your home. Banks do not need to offer you a home equity line.

Finally, I need to point out that some of that money should be reserved for an emergency fund if you don't already have one. One thing I've learned about homes is that things break, maintenance needs to be performed, and none of that is free. Make sure you've got enough in the way of funds to pay for that without needing to use a credit card to cover a sudden shortfall.

(To ask Helaine a question, email her at askhelaine@gmail.com.)

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