If they are selling why would they pay down the existing mortgage?
Am I not understanding the question?
Do they plan to keep the old house and buy another?
Will they get a new mortgage?
How long do they want to tie up that $60k? I wouldn't be thrilled to get a locked in 5.375% return.

If they are selling their home, absolutely don't pay down the mortgage now AND don't refinance either. Just wait and buy the new house with a new mortgage. No need to pay all the loan costs twice.

If they don't sell their existing home before they buy, might they need that $60K or part of it to be put down on the new home and to help carry the second mortgage until their house sells?

Maybe I too am confused.

As long as they keep enough $$ available for an emergency fund, I would say pay down the existing loan, even if they decide to sell before long. That is a sure return of 5.37% which is not at all bad right now and translates into more money in their pocket right now and longer term. Even if they sell soon, they will only have saved money; it was just the equivalent of a shorter term CD. I have a huge aversion to letting cash sit earning negligible interest, and see no advantage to paying interest on $60k.

*However* Chemocurl makes a very good point about perhaps needing some of the money for the transition between properties. They need to make a firm plan about what they intend to do, and figure out if they could handle the payments on the remaining $20K plus taxes etc.

Thanks, all. My instant reply to the idea of paying down the existing mortgages was, "Don't do that."

I see their point about NOT paying 5.375% on the $60K, but won't they pay a penalty to pay down the existing mortgage?

Wouldn't they be better off finding their 'new' house and THEN settling the old mortgage when they sell the present house? (Providing they buy/sell within six months, as they plan to do.)

Question remains what to do with the $60K in the interim -- where to put it where it's liquid.?

How about a 6 month CD? Not a great return but it's safe.

And with the current real estate/financial situation, I'll highly recommend that they talk to a realtor about selling their house first. They may have to do a short-term rental if they can't find a new house right away, but they'll be in a much stronger position to not own two homes, unless they have long-term plans to turn their present home into a rental.

What if they pay down the mortgage with the 60k, only to watch the housing market tank further,and lose equity in the home and not be able to draw it out,if needed...Invest it conservatively...

If I were parking $60k temporarily, I would shop for a savings/money market accounts. The site I use for tracking rates is bankrate.com; but there are several other internet sites that do the same thing.

Just make sure that the deposit is FDIC/NCUA insured and that there is no "catch", (like the high rate is only an intro rate).

After quickly glancing over the site this morning, I think the rate you get paid on such an account is equal to a 6 month CD and gives you the flexibility to pull the money out earlier if you need to.

Hope this helps!

I see their point about NOT paying 5.375% on the $60K, but won't they pay a penalty to pay down the existing mortgage?
I would suggest they read and understand their contract, but it is not normal, imho, for someone to be penalized for paying ahead on a mortgage, or for paying it off early.

Wouldn't they be better off finding their 'new' house and THEN settling the old mortgage when they sell the present house? (Providing they buy/sell within six months, as they plan to do.)
They might 'hope' to sell within six months, but I certainly would never count on it. If they buy before they sell, they had best be prepared for the expenses of having and maintaining 2 places, possibly for a very long time, unless they drastically reduce the price of their existing home in order to get it sold quickly.

Just my thoughts on the matter. I have seen too many folks get stuck with 2 mortgages when their previous house did not sell as quickly as they had thought, nor for the amount they thought they could get.

And not everyone is so concerned about equity. I don't consider my house specifically as an investment ... I see it more as an asset purchase that's on a payment plan. I didn't buy it with the express intention of later selling for a monetary gain ... I bought it to have a place to live for the long-term.

Would you mind going over this again -- with some more facts?

DS & DIL own a house with market value (according to realtors) of $400K - $430K. They owe $160K on a 15-year mortgage at a rate of 5.375%.

They are looking for a new (existing, just new to them)home in an area where median is $400K. They can afford a $150K mortgage on a single salary. One will finish school in the health tech field in 18 mos.

They would put their current home on the market in January. They are *looking* at what's available in the new location.

They have $60K freshly out of CDs that's earning zilch. There is no penalty to pay down their existing mortage. Taking $60K off the mortage balance would save them $268 per month; they'd NOT be paying 5.375% on that $60K. Why wouldn't they want to save 5.375% per month for however long their existing house doesn't sell and before they buy?

It's beginning to sound better to me. There's no pay-down penalty; they aren't and wouldn't be upside down in the current house; the $60K is going to go into the new property anyway. They have some other reserves.

Am I missing something?

Yes - you are missing something - risk. Right now, they have 60k cash sitting in their hand. If one of them gets sick, or loses their job, etc or if something major goes wrong in their lives, they have a very good safety net. This is especially important if one of them is in school and they are hoping to make big changes in their lives - like a move.

Just a real simple hypothetical. Say they pay down the loan today and the primary earner loses their job tomorrow. They won't be able to move. They won't be able to refinance without income. They will still have to make a mortgage payment and it will be the full amount - not $268 less.

The bottom line is that is just isn't worth taking the short term risk for such minimal gains.

How,unless they are refinancing,do they expect to prepay the 60k on mortgage and think the payment will go lower? You are just reducing the princiapl on the back end

Bill -- They do have other savings, but not a LOT. I see you point!

gdwag -- Well, duh! Thanks for the accurate reading on what this means. So..they'd owe LESS, the mortgage would be paid off SOONER, but the monthly payments would stay the SAME for now. Since they plan to sell and close out that mortgage soon, there is no good reason for doing this with the $60K.

Thank you. Thank you!

Chisue, they will also need cash for the "good faith deposit" on the house they select, and for closing costs, the move, and in a worse case scenario, if the sale of their current house falls through after they commit to buying the new house, the mortgage payments on two homes. Not to mention any furniture, drapes, floor refinishing, paining, etc. for the new house. Buying a new house and moving is always more expensive than people think.

BTW, they should also have a retirement fund and a "life happens" fund. I wish them luck.

I wouldn't put that cash into the house. There's no reason to do so -- the amount they would save would be very small and not worth the risks that others have pointed out. Even if they had enough cash to pay the mortgage entirely, it doesn't seem worthwhile to pay it off if they are planning to move within a year or so.

Also, two more things: If I were in that position, I would sell before buying anything and would at least wait until the one person finishes school before making big financial changes. Will graduation mean a job search? That could change a lot of things; they might even want to live in a different area than they are now interested in when everything settles out.

As for where to park the cash, there aren't many good options right now. If they have any credit card or other high-interest debts, they could pay those off, but otherwise, a CD or equivalent-yield money market is probably the best bet.

colorcrazy and harriet, thanks for your posts.

They do have savings separate from what would go into another home.

I think the coming degree in the health care field will bring a good job quickly, but who knows?

They will be staying in Chicago because the city employees must live in the city. There are a limited number of outlying areas within the city where most police, fire, and educators settle. It's a pretty dumb law, put in place years ago to try to prevent 'white flight'. Doesn't work, but there it sits. I suppose it guarantees a better tax base, but it doesn't change segregation.

They know they'll need to sell their present home -- can't carry two mortgages. If things don't work out, the existing home will have to do. It's just not all they'd *like* to have in the way of neighbors.