So my general lack of math skills is slowing down some financial decisions my wife and I are trying to make, and I'm hoping the MMM community can help us sort through this. Here's the situation:

We recently decided that our investments for our next primary home purchase were a bit too risky, and as that purchase is 5 years away, we decided to move half of those funds to cash (with the other half in a 60/40 bond/stock fund). That gives us a pile of cash earning 0.8% or so (approx $37k).

Now, it just so turns out that the mortgage on our current property is right around $37k (4.25% interest on a 15 year fixed). Initially we'd thought, hey, let's just pay it off because 4.25% interest vs. 0.8% interest is an easy choice.

Here's where we get confused: we are planning to purchase a rental home this year (a different home from the one we're saving for 5 years from now). And completely paying off our current mortgage is supposedly a bad idea, according to our lender, since it's our only line of credit besides 3 credit cards. So, here are the options:

Option 1: Ignore what our lender says, pay off the current mortgage, save a little on interest, then take out a $150k mortgage on a rental property (30 year, say 4.25% fixed).

Option 2: Use $27k to pay down current mortgage to approximately $10k (giving us about a year to close on a rental property while keeping the current mortgage active). Then use the remaining $10k to pay off current mortgage once we close on the rental, leaving us only with one $150k mortage on the rental property.

Option 3: Use $27k as an additional downpayment on the rental property, only borrowing $123k, but leaving us paying two mortgages for a while. ($127k mortgage on rental, $37k mortgage on primary)

Option 4: Borrow $150k on the rental property, then pay the $27k as an additional payment to principal on the rental property's mortgage (again, this would leave us paying two mortgages for a while)

At this point there are so many variables that I'm coming up with weird outcomes. For example, it somehow seems to save us a bunch of interest when doing option 4 when compared to option 3, which makes no sense to me. Can anyone please give us some advice?