Navigating Mortgage Options When Buying a New Home

I plan to relocate to a different state within the next decade. One of the things that causes concern is selling my house — which has a low-interest mortgage — and having to finance another at much higher rates.

This week I saw this related question posed in one of Facebook’s financial interest groups. The question is related to my plans, so I will follow up with the course of action I recommend.

The Scenario

“Q: We have a low 6-figure balance on a 3% mortgage. If we planned to stay in our house forever, we would continue just making the required monthly payments. But we plan to move in ~3 years to a nicer neighborhood closer to family for childcare help. Knowing we’re unlikely to land another 3% loan, would you do anything now to better position yourself for a higher loan later?

For example, should we 1). Pay down the mortgage now so we can buy in cash and avoid a higher interest rate; 2). Put money in a high-yield savings account for a larger down payment later; or 3). Invest extra cash and just absorb whatever new mortgage payment is needed in 3 years, etc.”


Let’s take the last one first. Three years is a short timeframe. Under no circumstances should you invest money in the stock market or in any risky investment that you will need in three years. When a bear market comes along, it can take years to recover.

So, the options are to either pay down the current mortgage as fast as possible or to just put the money in a high-yield savings account.

The person who asked the question doesn’t indicate their Federal income tax bracket or whether they are currently itemizing on Federal taxes and deducting your mortgage interest. That is another consideration when comparing the two options.

An Example

Let’s make it simple. For every $1,000 they pay toward the mortgage, they are saving themselves about $30 a year in interest at 3%. If they deduct mortgage interest, that’s going to be closer to 2.5%, in which case the savings would only be $25.

Presently, high-yield savings accounts pay around 5%. If they put that $1,000 into a high-yield account, it’s going to earn them $50. However, they will owe taxes on that (federal and possibly state income taxes), so they may end up with only $40 after taxes.

But $40 is greater than $30 (or $25). So, if these are the options, the best thing to do would be to put as much money as possible into the high-yield savings account. When it’s time to buy the house, put down as much money as you can — depending of course on interest rates at that time.

Additional Considerations

However, there is one other consideration this person didn’t mention. If they have other debt (e.g., credit card or car payment) with interest rates above 5%, the first thing to do with any extra money is to pay down that debt. In this case, they are getting dinged $50, $100, or even more annually for every $1,000 of debt they have.

In summary, use extra cash to pay off high-interest debts. However, if you have a mortgage that below the rates you can currently get in a high-interest savings account, park excess money there if you need it in the short term.

If your time frame is longer than five years, it’s OK to put some of that money to work in the stock market. Just be careful with the risks you take. Even five years may be too short if you take excessive risks in the market.

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