Extra cash - pay down the principal or save for next down payment?
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I plan on moving into a bigger (and probably more expensive home) in the next 3-5 years. I have some extra cash above what I already save for retirement and emergency funds. Should I use this extra cash to pay down the principle on my current mortgage or continue to save it in a CD to use towards the down payment on my next home? I'm doing the same either way, right? OR is one way better than the other? I should mention I have no other loans or debt other than the current mortgage. Thanks
Extra cash - pay down the principal or save for next down payment?Putting the money into the CD gives you a tax disadvantage in that your interest earnings on it are taxed, but the additional equity you are purchasing in your home is not taxed (assuming you qualify for the real estate capital gains exemption).
However, the value of your house is not guaranteed (especially in this market), whereas the earnings on your CD are. So proceed with caution. Just by way of reference, I put a little bit of extra cash into my mortgage every month, but most of my extra income goes into stocks, spread across an IRA, 401(k), and a personal direct-purchase investment account.
Extra cash - pay down the principal or save for next down payment?There are two questions to answer:
Q1 If you pay down the mortgage you will convert liquid money into non liquid equity in your current house. This will not only make the house harder for the next buyer to buy subject to your current mortgage (he will have to come up with more cash), but also it means you will have frozen the extra cash so that the only way you can get it back is to sell.
Q2 There is the matter of which option will give the best return on your money. If the mortgage has a much higher interest rate than the CD then you probably should pay down the mortgage. If the difference is small, you should probably let the money stay in a CD (see reasons in Q1 above).
regards,
Texian - A former homebuilder
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