My wife and I have the (pleasant) problem of having too much cash. Part of the reason is that we have been looking to upgrade to a nicer house for the last few years, but we never found the right place, and now with a kid on the way we will most likely stay where we are for the next few years. But now the problem is what to do with all the cash! My only very slight hesitation in paying off the mortgage is because the interest rate is so low, although we are not really doing anything productive with the money we have.
Our Situation: We are 40 (give or take) and we both max out our retirement contributions (with employer matching). We have a 15 year mortage at 3%, with 175K left and 300K or so of equity. We have around 875K in cash earning 2.25% or so which is being taxed at quite a high rate. We have around 375K in the markets (my wife puts some of her paycheck there every month, this is in addition to retirement)
Our Savings Rate: We saved 100K last year, although we are having our first (and only) kid this year so that will go down. My job is very secure, my wife's job is secure for the next few years, but she is interested in exploring other things and so we expect our combined income to go down somewhat in the medium term (but should always be at least 250K).
Our goal: we would like to buy a house in the 1.25M-1.5M range in the next five years but not for at least three years.
Question One: It seems reasonable just to pay off the mortage now --- have I missed anything?
Question Two: Given our goal, what is a sensible thing to do with the remainder of our cash? If you recommend rebalancing our money towards the market, how slowly or quickly should that be done?
Concerns: I'm a little worried that when the times comes to buy a house the mortgage rates will have gone up substantialy, and want to avoid having to take out a big mortgage for liquidity reasons.