Pay extra on existing mortgage vs saving cash for future home upgrade?

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Drock3307
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Joined: Sat Aug 12, 2017 11:04 am

Pay extra on existing mortgage vs saving cash for future home upgrade?

Post by Drock3307 » Thu Dec 20, 2018 2:34 pm

Hello, we currently live in a 2BR condo which my family will outgrow within the next 5 years. Wife and I are 35/36 with 2 small kids and would like to buy a bigger home eventually but it is difficult due to high home prices in our area. We do not plan to move since most family/relatives live in the area. We have an 8 months worth of e-fund and $30k extra cash. Should we pay down our principal or save cash for down payment for a bigger home? We plan to sell existing home. We would love to keep it if we could rent it out and at least break even but hard to say where rents will be in the future. Today, we break even. It is a scary thought to have 2 mortgages and feel we are better off selling existing condo then put all equity as down payment to the new home so we won’t have much mortgage left. Currently, our equity is roughly $450k. Larger homes we are interested in are around $800k-$900k which is too high for my liking and comfort so waiting for the market to come down (maybe it won’t) to $650k-$750k but then my condo will be down as well and will have less equity. The most likely scenario is we’ll have to sell/buy at the same time (another I don’t know how to pull off). What’s our best strategy with extra cash (we have this annually) and timing of selling and buying a home? No debt other than existing mortgage and we contribute close to max both 401ks and half of IRA limits to both IRAs. Our interest rate on the condo is 2.62% with my wife’s discount through her employment. If she leaves (no plan currently but may eventually) it goes up to 4.6% fixed. We have about 22 yrs left.

Thank you for your comments.
Last edited by Drock3307 on Thu Dec 20, 2018 2:58 pm, edited 1 time in total.

Walkure
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Re: Pay extra on existing mortgage vs saving cash for future home upgrade?

Post by Walkure » Thu Dec 20, 2018 2:54 pm

Seems like mortgage rates 3-5 yrs out are expected to be higher (no guarantees, of course) than whatever you might be paying on the condo now. My gut says keep the 30k liquid.

tedgeorge
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Re: Pay extra on existing mortgage vs saving cash for future home upgrade?

Post by tedgeorge » Thu Dec 20, 2018 2:56 pm

If you are planning to move relatively soon, I would keep the cash on hand rather than put it in your mortgage. If the real estate market is down, remember that its down for you too as a seller. So you may not be able to move your condo when you want or at the price you want. Better to have the cash available to give you more options. Sure, your <insert mortgage rate> mortgage is a higher rate than your <insert savings rate> savings but peace of mind has some value too.

Buying and selling at the same time is gut wrenching even when you know you will close. You need to have enough cash to cover both mortgages and then all the other stuff like movers and buying stuff for the new place. Thinking about renovations too? More cash. You can spreadsheet it with guesses though so you can prepare yourself.

And it seems the best time to buy was always yesterday on houses. I know here the inventory is limited where people want to live so the demand never goes away.

dmk395
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Re: Pay extra on existing mortgage vs saving cash for future home upgrade?

Post by dmk395 » Fri Dec 21, 2018 7:39 am

Short term CD's with the cash. That rate is LOW.

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prudent
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Re: Pay extra on existing mortgage vs saving cash for future home upgrade?

Post by prudent » Sat Dec 22, 2018 6:33 am

Topic moved to Personal Finance.

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Tamarind
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Re: Pay extra on existing mortgage vs saving cash for future home upgrade?

Post by Tamarind » Sat Dec 22, 2018 6:58 am

If you plan to sell, put your extra cash towards the next place. If you pay down the mortgage, you get the return of the mortgage. You can do as well with liquid investments right now and take no risk. For instance, my home reno fund for a large upcoming project is in an Ally No-Penalty CD and gets 2.3%. If I were willing to lock it up for a year I could get 2.7%, beating your return on the mortgage prepayment.

Golf maniac
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Location: Florida

Re: Pay extra on existing mortgage vs saving cash for future home upgrade?

Post by Golf maniac » Sat Dec 22, 2018 9:29 am

Agree with everyone, interest rate is extremely low, put excess cash in short term principal protected investment. 5 years is a long time in real estate, no telling where your market may be. One possibility as you move closer to your move date is to sell condo first and rent for a bit of time. That way you don’t have to deal with the selling home at the same time you are buying and you know exactly how much you have for a down payment. Or you could try to negotiate with your condo buyer to let you rent the condo for a few months until you find your new home.

techland
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Re: Pay extra on existing mortgage vs saving cash for future home upgrade?

Post by techland » Sat Dec 22, 2018 12:02 pm

you guys consider 5% interest rate low?

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