3-year horizon before trading up to next home: put windfall in savings, or pay off mortgage?
First, I would want cash around the time I made the move.  I would like enough for a 20% down payment, moving expenses, and enough for 6 months of mortgage payments on the existing house.  This way if the house does not sell quickly, you are safe.  As you approach the time it comes to move, you can work backwards on how much time you would need to accumulate that kind of money. Second, this does not have to be an all or nothing kind of thing.  Perhaps you use some of the proceeds to beef up your retirement, some to pay down the mortgage, and some for savings.  You could be very wrong about the market, even so it is a wonderful opportunity to add to your nest egg at such a young age.  My own self prefers to do things in ratios.  In your case I might do 10% of the proceeds in for retirement, 10% for savings, and 80% for mortgage reduction.  (You may want to also add some charitable giving.)   I really like paying down the mortgage.  Not only is it a risk less investment, it reduces your personal risk. A few points to consider - Welcome to Money.SE. This is not a discussion board, but rather, a site to ask and answer personal finance questions that are factual in nature. Your question is great, in my opinion, but it's a question that has no answer, it's opinion-based. So I'm slipping this in to help you, and suggest you visit the site to see the great Q&A we've accumulated over the years. You may have to both save your windfall in a savings account and use it to pay down your mortgage. Almost every mortgage has some sort of pay-down option that allows you to pay off a percentage of the original principal without penalty. Any amounts above that will be penalized, most likely by the amount of interest the lending institution would have collected. Ask your lender what the penalties are and what penalty-free pay-down options you have. Knowing that and how much you will receive each quarter by selling the company stock will tell you how much of your money you need to put against your house and your savings account.
"Here is the thing if in 2020-2040 you can buy CD's that pay 4% then you would kick yourself for paying your mortgage early and costing you a no risk 1% revenue on your money. Think about this?  You have a 4% mortgage that is costing you less than 3% after tax deduction"" in 2025 you are buying 10 year notes at 7% which is not out of the question.   You will be making 4% on your money with virtually no risk. Personally I agree with JoeTaxpayer.  I have gone a step further and done so with two houses and I netted myself over 20 grand in 30 months. So in short you have to ask yourself ""Can I make more than 3% on my money?""" When on this topic, you'll often hear general rules of thumb. And, similar to the 'only buy stocks if you plan to hold more than X years' there are going to be periods where if you buy at a bottom right before the market turns up, you might be ahead just months after you buy. I'd say that if you buy right, below market, you're ahead the day you close.  Edit - I maintain, and have Schiller providing supporting data) that real estate goes up with inflation in the long term, no more, no less. If the rise were perfectly smooth, correlated 100% month to month, you'd find it would take X years to break even to the costs of buying, commission and closing costs. If we call that cost about 8%, and inflation averages 3, it points to a 3 year holding period to break even. But, since real estate rises and falls in the short term, there are periods longer than 4 years where real estate lags, and very short periods where it rises faster than the costs involved.  The buy vs rent is a layer right on top of this. If you happen upon a time when the rental market is tight, you may buy, see the house decline 10% in value, and when the math is done, actually be ahead of the guy that rented. Certainly, paying off the mortgage is better than doing nothing with the money. But it gets interesting when you consider keeping the mortgage and investing the money. If the mortgage rate is 5% and you expect >5% returns from stocks or some other investment, then it might make sense to seek those higher returns. If you expect the same 5% return from stocks, keeping the mortgage and investing the money can still be more tax-efficient. Assuming a marginal tax rate of 30%, the real cost of mortgage interest (in terms of post-tax money) is 3.5%*. If your investment results in long-term capital gains taxed at 15%, the real rate of growth of your post-tax money would be 4.25%. So in post-tax terms, your rate of gain is greater than your rate of loss. On the other hand, paying off the mortgage is safer than investing borrowed money, so doing so might be more appropriate for the risk-averse. * I'm oversimplifying a bit by assuming the deduction doesn't change your marginal tax rate. "Trying to determine what the best investment option is when buying a home is like predicting the stock market. Not likely to work out. Forget about the ""investment"" part of buying a home and look at the quality of life, monthly/annual financial burden, and what your goals are. Buy a home that you'll be happy living in and in an area you like. Buy a home with the plan being to remain in that home for at least 6 years. If you're planning on having kids, then buy a home that will accommodate that. If you're not planning on living in the same place at least 6 years, then buying might not be the best idea, and certainly might not be the best ""investment"". You're buying a home that will end up having emotional value to you. This isn't like buying a rental property or commercial real estate. Chances are you won't lose money in the long run, unless the market crashes again, but in that case everyone pretty much gets screwed so don't worry about it.  We're not in a housing market like what existed in decades past. The idea of buying a home so that you'll make money off it when you sell it isn't really as reliable a practice as it once was. Take advantage of the ridiculously low interest rates, but note that if you wait, they're not likely to go up by an amount that will make a huge difference in the grand scheme of things.  My family and I went through the exact same thought process you're going through right now. We close on our new house tomorrow. We battled over renting somewhere - we don't have a good rental market compared to buying here, buying something older for less money and fixing it up - we're HGTV junkies but we realized we just don't have the time or emotional capacity to deal with that scenario, or buying new/like new. There are benefits and drawbacks to all 3 options, and we spent a long time weighing them and eventually came to a conclusion that was best for us.  Go talk to a realtor in your area. You're under no obligation to use them, but you can get a better feel for your options and what might best suit you by talking to a professional. For what it's worth, our realtor is a big fan of Pulte Homes in our area because of their home designs and quality. We know some people who have bought in that neighborhood and they're very happy. There are horror stories too, same as with any product you might buy." Yes, take the new rate, but instead of using the new 30 year term, calculate the payment as though the new mortgage were at the remaining term. 3 years into a 30? You calculate the payment as if the new mortgage were 27 years.  This will tell you what you are really saving. Now, take that savings and divide into your closing costs if any. That will give you the break even. Will you be in the house that long?  If you can find a no closing cost deal, it's worth it for even 1/8% savings. My figuring (and I'm not an expert here, but I think this is basic math) is: Let's say you had a windfall of $1000 extra dollars today that you could either: a. Use to pay down your mortgage b. Put into some kind of equity mutual fund Maybe you have 20 years left on your mortgage.  So your return on investment with choice A is whatever your mortgage interest rate is, compounded monthly or daily.  Interest rates are low now, but who knows what they'll be in the future.  On the other hand, you should get more return out of an equity mutual fund investment, so I'd say B is your better choice, except: But that's also the other reason why I favour B over A.  Let's say you lose your job a year from now.  Your bank won't be too lenient with you paying your mortgage, even if you paid it off quicker than originally agreed.  But if that money is in mutual funds, you have access to it, and it buys you time when you really need it.  People might say that you can always get a second mortgage to get the equity out of it, but try getting a second mortgage when you've just lost your job. This is a somewhat complicated question because it really depends on your personal situation.  For example, the following parameters might impact your optimal asset allocation: If you need the money before 3 years, I would suggest keeping almost all of it in cash, CDs, Treasuries, and ultra safe short-term corporate bonds. If however, you have a longer time horizon (and since you're in your 30s you would ideally have decades) you should diversify by investing in many different asset classes.  This includes Australian equity, international equity, foreign and domestic debt, commodities, and real estate.  Since you have such a long time horizon market timing is not that important. So I will attempt to answer the other half of the question since people have given good feedback on the mortgage costs of your various options. Assumptions:   It is certain that I am off on some (or all) of these assumptions, but they are still useful for drawing a comparison.   If you were to make your mortgage payment, then contribute whatever you have left over to savings, this is where you would be at the end of 30 years. Wait, so the 30 year mortgage has me contributing $40k less to savings over the life of the loan, but comes out with a $20k higher balance?  Yes, because of the way compounding interest works getting more money in there faster plays in your favor, but only as long as your savings venue is earning at a higher rate than the cost of the debt your are contrasting it with. If we were to drop the yield on your savings to 3%, then the 30yr would net you $264593, while the 15yr ends up with $283309 in the bank.  Similarly, if we were to increase the savings yield to 10% (not unheard of for a strong mutual fund), the 30yr nets $993418, while the 15yr comes out at $684448.  Yes in all cases, you pay more to the bank on a 30yr mortgage, but as long as you have a decent investment portfolio, and are making the associated contributions, your end savings come out ahead over the time period.  Which sounds like it is the more important item in your overall picture. However, just to reiterate, the key to making this work is that you have an investment portfolio that out performs the interest on the loan.  Rule of thumb is if the debt is costing you more than the investment will reliably earn, pay the debt off first.  In reality, you need your investments to out perform the interest on your debt + inflation to stay ahead overall.  Personally, I would be looking for at least an 8% annual return on your investments, and go with the 30 year option. DISCLAIMER: All investments involve risk and there is no guarantee of making any given earnings target. "I've heard that the bank may agree to a ""one time adjustment"" to lower the payments on Mortgage #2 because of paying a very large payment. Is this something that really happens? It's to the banks advantage to reduce the payments in that situation.  If they were willing to loan you money previously, they should still be willing.  If they keep the payments the same, then you'll pay off the loan faster.  Just playing with a spreadsheet, paying off a third of the mortgage amount would eliminate the back half of the payments or reduces payments by around two fifths (leaving off any escrow or insurance).   If you can afford the payments, I'd lean towards leaving them at the current level and paying off the loan early.  But you know your circumstances better than we do.   If you are underfunded elsewhere, shore things up.  Fully fund your 401k and IRA.  Fill out your emergency fund.  Buy that new appliance that you don't quite need yet but will soon.  If you are paying PMI, you should reduce the principal down to the point where you no longer have to do so.  That's usually more than 20% equity (or less than an 80% loan).   There is an argument for investing the remainder in securities (stocks and bonds).  If you itemize, you can deduct the interest on your mortgage.  And then you can deduct other things, like local and state taxes.  If you're getting a higher return from securities than you'd pay on the mortgage, it can be a good investment.  Five or ten years from now, when your interest drops closer to the itemization threshold, you can cash out and pay off more of the mortgage than you could now.   The problem is that this might not be the best time for that.  The Buffett Indicator is currently higher than it was before the 2007-9 market crash.  That suggests that stocks aren't the best place for a medium term investment right now.   I'd pay down the mortgage.  You know the return on that.  No matter what happens with the market, it will save you on interest.  I'd keep the payments where they are now unless they are straining your budget unduly.  Pay off your thirty year mortgage in fifteen years." I would also consider the following factors: How stable is your income?  Are you in an industry that could vanish in the near future?  How long would it take you to replace this income?  If you are at risk, then you need to consider that your lenders do not care how fast you've paid down your debt.  All the care about is that you make next month's payment.  You need to have liquid reserves available to weather any storm. (current wisdom is 3-6 months expenses).  It may be prudent to put this money in GICs or T-bills.  There may be an early withdrawal penalty, but at least you won't lose your house. (obviously, this isn't as important when you can actually retire all debt) What's your debt level?  If it's more than 3x income, then reducing that number might be the most prudent. On another note, what is your expected retirement income?  IRAs defer the tax to a later year. BUT, if you expect a great pension, it is feasible that you might be in a higher tax bracket on retirement (when you withdraw the funds) than you are now -- A situation that makes Indexed Retirement planning counterproductive. (Rich people don't buy IRAs) "Given the current low interest rates - let's assume 4% - this might be a viable option for a lot of people.  Let's also assume that your actual interest rate after figuring in tax considerations ends up at around 3%.  I think I am being pretty fair with the numbers. Now every dollar that you save each month based on the savings and invest with a higher net return of greater than 3% will in fact be ""free money"".  You are basically betting on your ability to invest over the 3%.  Even if using a conservative historical rate of return on the market you should net far better than 3%.  This money would be significant after 10 years.   Let's say you earn an average of 8% on your money over the 10 years.  Well you would have an extra $77K by doing interest only if you were paying on average of $500 a month towards interest on a conventional loan.  That is a pretty average house in the US.  Who doesn't want $77K (more than you would have compared to just principal).  So after 10 years you have the same amount in principal plus $77k given that you take all of the saved money and invest it at the constraints above. I would suggest that people take interest only if they are willing to diligently put away the money as they had a conventional loan.  Another scenario would be a wealthier home owner (that may be able to pay off house at any time) to reap the tax breaks and cheap money to invest. Pros: Cons: Sidenote:  If people ask how viable is this.  Well I have done this for 8 years.  I have earned an extra 110K.  I have smaller than $500 I put away each month since my house is about 30% owned but have earned almost 14% on average over the last 8 years.  My money gets put into an e-trade account automatically each month from there I funnel it into different funds (diversified by sector and region).  I literally spend a few minutes a month on this and I truly act like the money isn't there.  What is also nice is that the bank will account for about half of this as being a liquid asset when I have to renegotiate another loan." Between now and October, your $3,000 will earn $30 in your savings account. If you are late on a payment for your 0% loan, your interest rate will skyrocket.  In my opinion, the risk is just not worth the tiny gain you are trying to achieve in the savings account. If it was me, I would pay off the loan today. A few more thoughts: There is a reason that businesses offer 0% consumer loans.  They are designed to trick you into thinking that you are getting a better deal than you are.  Businesses don't lose money on these loans.  The price of the loan is built into the cost of the purchase, whether you are buying expensive furniture, or a car.  Typically with a car, you forfeit a rebate by taking the 0% loan, essentially paying all the interest up-front.  Now that you have the loan, you might be ahead a few dollars by waiting to pay it off, but only because you've already paid the interest.  Don't make the mistake of thinking that you can come out ahead by buying things at 0%.  It's really not free money. In the comments, @JoeTaxpayer mentioned that fear of mistakes can lead to missed rewards.  I understand that; however, these 0% loans are full of small print designed to trip you up.  A single mistake can negate years and years of these small gains.  You don't want to be penny wise and pound foolish. "As the answer above states, future inflation mitigates ""unwise"" for a longer term mortgage, at least in financial-only terms.  But consider that, if you lose your ability to make payments for long enough time ANYTIME during term, the lending institution has a right to repossess, leaving you with NOTHING or worse for all the maintenance you've had to do.  You can never know, but eleven years into my mortgage, I lost enough of my income for just long enough time to have to sell for just enough to pay the remainder of the mortgage and walk away with empty pockets.   To help clarify understanding even better, contrast the 30-yr mortgage with the other extreme: save up and own from day one.  When I did the math a few years ago, buying with a 30-year mortgage would cost cumulatively almost 3 times the real house value in mortgage payments with never the freedom to suspend payments when I might need to.  Being a freedom-loving American, I determined to buy a house with cash.  DON'T FORGET that mortgageable properties are over-priced just because buyers less wise than you are so willing to borrow to buy them, so I decided to buy some fixer-upper that no bank would lend on.  I found such a fixer-upper, paid cash, never have to worry about repossession by a lender, can continue to save up for my dream home which I'll own a lot sooner, and will have a nice increase in house value while I fix it up to help get me there, and NO INSURANCE PAYMENTS to some insurer who'll tell me what I can't do with MY property. Let the next buyer of your fixed-up, paid-off house pay YOU the over-priced amount they are willing to pay just because THEY can get that 30-year mortgage, and you enjoy the freedom to dream and adjust your budget to the needs of the moment and end up with a house in 30 years (15, more realistically) that is 2.5 times more valuable.  And keep from fighting with your spouse over finances in the meantime." "Pete and Noah addressed the math, showing how this is, in effect, converting a 30yr to a ~23yr mortgage, at a cost, plus payment about 8% higher (1 extra payment per year). No magic there. The real issue, as I see it, is whether this is the best use of the money. Keep in mind, once you pay extra principal, which in effect is exactly what this is, it's not easy to get it back. As long as you have any mortgage at all, you have the need for liquidity, enough to pay your mortgage, tax, utilities, etc, if you find yourself between jobs or to get through any short term crisis.  I've seen people choose the ""sure thing"" prepayment VS the ""risky"" 401(k) deposit. Ignoring a match is passing up a 50% or 100% return in most cases. Too good to pass up.  2 points to add - I avoided the further tangent of the tax benefit of IRA/401(k) deposits. It's too long a discussion, today's rate for the money saved, vs the rate on withdrawal. Worth considering, but not part of my answer. The other discussion I avoid is Nicholas' thoughts on the long term market return of 10% vs today's ~4% mortgage rate. This has been debated elsewhere and morphs into a ""pre-pay vs invest"" question." At a minimum, I would save 20-30k, because you need to have both a safety net and some money for home repairs.  Very few people move into a house and then do zero repairs - painting, usually, at a minimum, and there's almost always something that comes up pretty soon after.  Even if you're buying a condo, you'll want to be sure you can fix anything that needs fixing within that first year or two. Beyond that, you have to decide based on your risk tolerance and your other details, like your income.  Taking a smaller mortgage means a guaranteed 3% to 4% return, right now.  That's not quite what you'll probably get on the market over the long term, but how did your investments do last year?  My 401(k) was down slightly...  In order to do better than that 3-4%, you're going to have to invest in stocks (or ETFs or similar), meaning you could have 10+% swings potentially year over year, which if that's your only (extra) 50k might be more than you can tolerate. If you're very risk tolerant and mostly looking to make money over the long term, then it may be worth it to you.  But if a larger mortgage makes it harder to pay the monthly payments (a meaningfully smaller buffer), or if your job is such that you might end up having to sell those investments at a loss to cover your mortgage for a few months because you (didn't make enough|got laid off|etc.), then you may want the smaller mortgage to make that less of a risk (though still setting aside the safety net in something minimally risky).