Pay Down Mortgage If We Will Move in 5 Years?

[tet4904]

My husband and I are in need of some advice. We owe $387,000 at 4.78% on our mortgage (27 years left). It is a small 2 bedroom house, so we plan to move in 5 years so our kids can have their own rooms. We already max out our Roth IRAs, my husband's 401k, and contribute to a college fund each month. We have no debt besides our mortgage. We have $90,000 in cash which is currently sitting in a Capital One 360 savings account making 0.7% interest. We are not interested in rental properties.

Here is my question: What do we do with $90,000 in cash we have right now? Should we use some of it to pay down our mortgage even if we will be moving in 5 years? We will obviously keep some for an emergency fund. We don't want to lose any money by investing it in stocks for 5 years, and the rates for CDs are only around 1%. Is it better for the money to be in cash or equity when we sell this house and buy a more expensive one?

Thank you for your help!

Tiffany

Additional info:
Husband's gross income: $115,000
I will likely return to teaching in 5 years.
Our current house is not in an ideal neighborhood, so moving is more desirable than renovating.

[Cheddar Stacker]

First, read through this thread and any other similar ones you can find here. Paying off a mortgage vs. investing is a common debate on this forum with many people on each side of the argument.
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

I think issue number 1 is you should not be carrying an emergency fund of $90K unless you have some wildly erratic income streams and very high expenses. You either need to invest some of that, or use it to pay down the mortgage. You are currently losing 4% by holding it in cash.

The value of your loan will likely be irrelevant to the sale price of your home in 5 years. If the market allows you to sell for $400K, it won't matter whether your loan is $380K or $300K. You are simply trading one asset for another, cash for home equity. The benefit to paying off the mortgage is reduced interest carry costs while you own the home/hold the mortgage. Since you plan to sell within 5 years, you should be able to get the money back out to invest or buy another home.

If I were in your position I would invest $80K or of that $90K.

If you are debt averse (or risk averse), or you feel very strongly the market is overvalued, pay down $80K of the mortgage instead. It will save you $3,200/year ($80K * 4%) in mortgage interest and $16K over the next 5 years. If you need a bigger emergency fund, get a HELOC with the new home equity you just acquired.

*Edited grammatical mistake noted above.*

[MooseOutFront]

I need to hit the like button on cheddarstacker's post.  I wouldn't be scared to invest the majority of that money in the market.  If, in 5 years when you want to move the market is down, you either wait to move or fund it through other means rather than sell off the stocks.

Though 4.78% guaranteed sounds pretty good and I wouldn't blame you for just paying down the mortgage.  I personally would prefer to keep my liquidity.

[Gerard]

I second Cheddar Stacker.

Also, if you have two kids and you're moving to get them a bedroom each, is there any way you could stay where you are and renovate yourself up another bedroom? Moving is expensive, and moving to a bigger house is double expensive. It sounds like you've got a ton of house to pay for already!

[dragoncar]

What tax bracket are you in?  In other words, what is your effective interest rate?

I am usually against paying down mortgage partially.  But if you know you are going to sell relatively soon, I think it can work.  The reason being that you know you will get access to the cash again, not locking it away for 30 years (effectively a 30 year CD).

If you pay down the mortgage, you won't have it for a down payment on the new house.  This may not matter, but consider that your offer on the new house will be stronger if you can buy it without having to sell your old house (i.e., no complicated contingencies).  If you make enough to qualify for both mortgages, you may want the flexibility of buying the new house while your old house is still on the market.  So in this case you may wish to keep the cash more liquid.

[tet4904]

Thank you for your advice so far. I've added some additional info and look forward to learning more!