bj We had a simialr siutation. We used up our cash on the first 2 draws plus a partial on the third (the bank paid the other part of draw 3). AFter that - all draws were paid by the bank. We chose this route to delay the interest payments on the contruction loan for as long as possible. We broke ground in September of last year - but our first significant payment of interest to the bank just started this month. That worked out best for us because we had big delays (remember to get a schedule!) and at least we weren't caught having to pay interest on the loan during this time. You could flip the strategy and use bank funds up early - but then you have interest payments earlier. And if you have a delay - you will be paying interest (stress meter is starting to rise!) Either way can work - just think about your cash flow as well as tax situation (maybe you need the write off). The mechanics are very simple. For the draws we paid from our cash - we wrote the builder a check. Get a receipt for the draw from the builder because the bank needs it as proof of payment before they will start paying draws from the money you are borrowing. When you do this - you might want to have your own inspection done prior to each draw to make sure all work has been done to code or do your own inspection. I chose to do my own inspection. Once you are through with your cash out - then the builder will make contact with the lender to say he is ready for the next draw. The lender will schedule an inspection - once complete - the draw will be paid. Don't expect these inpsections to be anything more than a quick look to make sure that the major pieces are in place. We decided to have an active role in the dispersement of the money (your lender should have a form that you must sign and the builder must sign that is an agreement on the disbursement method). An active role means that when the builder asks for the draw - the bank contacts me to see if it OK to send the money, even after the inspection is done. I also opted (this is on the disbursement form) to have the money deposited into our bank account. Then I pay the builder with a check. My builder does not like this arrangement - most won't. My banker advised me to do it since it gives me some level of control. I happen to like it. If you opt for the passive role, then the builder asks for a draw - bank sends out inspector - and then money is directly deposited into the builders account. You are notified of what is going on, but the entire transaction is done without you having to specifically approve of the draw disbursement. Hope this helps.

Just a heads up (with no political comment intended and please no political comments in response). One of the things proposed in the debt ceiling negotiation are lower rates but with a reduction or maybe elimination of certain deductions including the home mortgage interest deduction. I have no idea whether that shakes out or not, but If it does happen, it would favor paying off home mortgages earlier. Now, regardless of what happens, my opinion is that in general -- and there are always exceptions -- paying extra towards a home mortgage when you can is good fiscal discipline even though when you run the numbers their may be a slight advantage the other way. The only things that probably should come first, other than are higher interest rate debt ( if any) emergency reserves and retirement savings. As others have said, a debt free home is very liberating. It's also an emotional disincentive to overextending by trying to keep up with the jones. It's easy to rationalize moving into something more expensive if you've got a mortgage and moving up will only cost x dollars a month more, it's much harder to go from no mortgage even to a small one. Now this is where exceptions come in especially depending on where you are in life like a growing family that really need more room, but generally I think folks are happier with a mortgage free home, than one that may be slightly nicer/bigger. Kymike does make a good point on flexibility. That's why when we bought a second home, after our primary was paid and the kid was out of college and with 45 percent down, we went with a 30 year mortgage, but ran a second amortization schedule for a ten year payoff. We're ahead of the ten year track slightly, but have the comfort of knowing that if bad times hit we will be okay. This also disciplined us not to over extend inthe first place and will have it paid for 4-5 years prior to retirement. It's also kept us more frugal on other nonessentials but those are sacrifices we can live with.

"Short term (savings) rates (eg 5+% available at many online banks) and long-term rates (eg mortgages) are very close together right now, a phenomenon known as an inverted yield curve (or approaching it). Tax effects are approximately the same in both cases (cancel each other out) so they can more or less be ignored." Not really. The mortgage rate is locked in. The short-term savings rate is not. As I said, you should easily be able to beat the current interest rate on a 15-year mortgage with even a conservative long-term investment approach. If I understand you correctly, if you go the HELOC route, that menas you're going to buy the new house with cash. If you take a mortgage, you're not. In the first instance, you're going to have to liquidate some of your investments. In the second, case you're not. You're most likely to wind up further ahead if you keep more of your money invested, and that's true even taking the closing cost of the mortgage into account. Of course, it could be that the security you feel from not having to pay a mortgage is worth a financial sacrifice to you. You'll have to decide what that's worth to you. But since you want to know what I'd do, I'll tell you -- I'd go for the mortgage.

The idea of front loaded interest on mortgages is a bit of a misconception, while you pay more interest in the early years that is only because you owe more money (If you have a 3.9% mortgage then you pay 3.9%/12 on the outstanding balance you owe each month). While that may sound pertinent, the discussion is really about effective interest versus compounding interest. As you pay on your principle you pay less interest, so over time the interest charges are smaller because your principle is smaller. While on an investment you start with a principle and if left alone for some period of time the interest continues adding to the principle and therefore pays more interest. This discussion is largely around the idea of people who have some income coming in and some ability to make payments. While, I could note that guaranteed payment annuities are about equal to house payments, they are no more liquid than houses so not really an investment that is better than a house. In the end, we are discussing people who want to be done with the headache of a mortgage and not people who simply don't have the income to continue paying a mortgage. Edit: It is also important to remember that a 15 year mortgage doesn't mean you have to make 15 years of payments. Making even a few years of payments before liquidating the investments to pay off the balance will typically result in gains. I think a lot of people focus too much on the stress of coming up with the money for monthly payments and forget that any time you get tired of stressing over payments, you can simply liquidate your investment and pay off the loan. While I have said the same thing jn3344 has many times, I have a completely different conclusion. When you have a paid off house and little money in the bank you have no options for dealing with uncertainty. Cash gives you options, the farther you get from cash the less options you have, and nothing is farther from cash than a house. Think of it this way. My father was just this week presented with a treatment option for a medical condition that was not covered by Medicare, the time sensitive treatment was going to cost $35,000, but it would greatly improve his quality of life. What allowed my father to make that decision was having access to $35,000, if he paid for his house outright and didn't have any money then he couldn't make that decision. Now suppose spending this $35,000 means my father will not be able to continue paying his mortgage and will have to move out of his house into a smaller apartment. I feel confident he will tell you walking around his smaller apartment beats not being able to walk around his bigger house. Edit: Many people have a false sense of security from a home. The only real security a paid off home provides is the equity (the access to cash). Homes are fairly inefficient domiciles, the taxes, maintenance and less efficient utilities minimize any real savings over renting. The path to homeless has nothing to do with a paid off house and a lot to do with not enough cash.