Saving for a new house in <4 years - what to do with cash?

[Honest Abe]

Currently have $50k equity in our home (worth $260k.) In about 4 years we'd like to buy a house in a better neighborhood with better schools for our yet-to-be-conceived child. I plan on slowing my investments into VTI-VWO and accumulating cash or equities.

Should I

a) Save cash for the sake of liquidity/new down payment

or b) pay down the principal on our 4.5% mortgage

'

[matchewed]

Given that you can't determine your mortgage rate in the future, if you feel that mortgage rates will be higher and that you can sell your current house for similar or more to what you have now then actually paying down the mortgage and using the sell as a down payment makes sense. Keep in mind that this strategy is exactly what burned people 2008. If home prices tank you can be left holding the bag. The more conservative method is cash.

(and boom Seņor Mustachian level, sorry to thread jack Abe)

*Edit in italics due to me not proofreading.

[Honest Abe]

(grats)

Here's what I don't get about the statement you just made (and I've heard it made quite often)

When paying down your mortgage you're not "investing" it your house, rather you're just paying down a loan that you owe the bank.... I'm going to have to pay this back when I sell my house if my home value goes up or down..

Am I missing something?

[matchewed]

It's the difference between your mortgage rate and the interest rate on savings. Paying off mortgages is like investing in a guaranteed return of the mortgage rate.

For a 4 year timeframe I think the question is moot and you should go for the cash method as you can arrange for a loan with it as down payment instead of relying on selling a house that may or may not be worth more in the future. Any amount you do get from the home sale will just be gravy that can go into investments.

No you're not "investing" in your house, that is correct. But you are reducing your amortization payments by paying down the mortgage, and those payments are structured around that mortgage rate.

[Another Reader]

If I were going to buy the new house without first selling the old house, then I would save/invest the down payment separately.  If I would have to sell before I buy, then I would put the money where I could get the best return with reasonably low risk.  I might put some in dividend stocks, some in I-bonds, and some in CD's and shift away from stocks over time.  As I got closer to buying, I would shift into cash and short term CD's.  If I felt I could get a better overall rate of return paying down the mortgage, I would do that with all or most of the savings.  I would also make sure I had sufficient cash reserves to qualify for the mortgage and for a solid earnest money deposit if needed as I got close to purchasing.