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I recently purchased a house for $125k, currently the mortgage balance is $100k, but value increased during COVID to ~$210k. I am expecting to earn a lump sum of money, enough to pay off the mortgage in its entirety, plus car loan, which would leave me debt free.

Though I'd like to be debt free, we may consider moving to another city where the properties are significantly more expensive, perhaps a year later. That would likely require another mortgage of at least $150k, as the smallest houses start at $350k.

Is there any disadvantage to be found from paying off a mortgage, and then a year later, moving anyway to a different house?

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    I suppose you won't have to juggle paying off the old mortgage while taking out a new one?
    – user253751
    Nov 17 at 17:16
  • money.stackexchange.com/search?q=pay+off+mortgage+credit+score may have some relevant information as to the impact (if any) of paying off your mortgage and car loan on your credit score. That score will then have an impact on your next mortgage.
    – Freiheit
    Nov 17 at 17:40
  • Will you be selling the old house and getting the cash for it before buying the new one, or will you need cash on hand to close on the new house before the sale on the old is complete? You used to be able to get a "bridge loan" on the equity of the old house to help pay for a new one, but banks don't do that since the 2008 financial crisis.
    – Seth R
    Nov 18 at 15:45
  • Wouldn't you want to reserve enough cash to make a down payment on your new house, so that you would not be contingent on selling your old house before being able to purchase the new one?
    – Glen Yates
    Nov 18 at 15:53
  • Note the opposite question (stop paying entirely, or take out a bigger loan) was asked over here: money.stackexchange.com/questions/115185/…
    – Brondahl
    Nov 19 at 17:51
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The biggest risk is if the act of making you debt free also leaves you cash poor. Taking every dollar to retire all your debt, but vulnerable to a surprise bill might not be desirable.

If you can still retain your emergency funds that would help. Your lower monthly expenses for a year, will make it easier to build up the funds that you will need during the moving process.

One thing you want to look at is does being debt free make the act of buying the next house harder, or easier. If you have a mortgage on the current house, and you can't afford two mortgages, you have to sell the current house first. But if the down payment for the new house is wrapped in the equity of the current house, you still have to sell one house to afford the other.

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    IMHO, knocking out the car loan is almost certainly worth it. The mortgage is probably a wash, because you're either going to pay off the old mortgage now and then use the proceeds from its sale to make a down payment on the new mortgage (and/or for other purposes), or else you're going to pocket the cash now, pay off the old mortgage at the same time as you sell the old house, and then use the cash for the down payment. The only difference is a year of interest, which is probably worth thinking about but probably not worth stressing over. Or else you keep both houses, and rent one out.
    – Kevin
    Nov 18 at 4:27
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    Consider you need to live somewhere for the year between selling the house and moving to the new one. Is the cost of renting less than the mortgage interest for that time period? Nov 18 at 15:24
  • 3
    @Kevin You're forgetting a more likely scenario: needing to make a down payment on a new house before selling the old house.
    – chepner
    Nov 18 at 19:46
  • @chepner: There are several ways around that: 1. Sell first, rent for a little while, and then buy. 2. Take out a short-term home equity loan, buy, sell, and then repay the loan. 3. Just hold the cash and use it for the down payment, as I already suggested. (2) is probably inferior to (3) assuming realistic interest rates (unless the existing mortgage is some crazy-high interest rate), but it's such a short-term period that it may not make that much of a difference in practice.
    – Kevin
    Nov 18 at 19:56
  • @BinaryWorrier in the question as presented, rent is not an issue. The lump sum is coming from a source other than selling the old house. Nov 18 at 23:59
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Tax Breaks and Market Returns

Mortgage interest is a tax break in the US, and mortgage interest rates are low enough that you probably make more money in the stock market than you lose paying the interest.

So depending on your specific tax situation, it could make better sense to do something like:

  • Pay off the car
  • Continue paying the mortgage
  • Put 15k in a 1 year CD
  • Put the rest of the money in an index fund to earn more money

Buying the New Place

If homes in the new area are 350k, you'd want about 100k on hand to move in. 20% for down payment + 10% for transaction costs = 30% and 30% of 350k is 105k.

Since you think your existing place is worth 210k and you owe 100k, you have 110k in equity in the existing home, and can cover the move without any of the lump sum money.

I'd probably want to have a little more than that around, just in case home prices move between now and then, which is why I recommended putting ~15k in a 1 year CD.

This is predicated on maximizing returns. If you want to prioritize eliminating debt, this might not be the plan for you. But in the US, since 2008, mortgage rates have generally been so low that mortgage debt is very "healthy" debt to have.

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    Nitpick - putting money in an index fund maximizes potential returns - there's still a very good change that even an index fund loses money over a year.
    – D Stanley
    Nov 18 at 21:15
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    @DStanley: Personally, I'd just mentally replace "index fund" with "whatever your retirement fund looks like, which probably should be some kind of low-fee mixture of index funds, bonds, etc. depending on your age."
    – Kevin
    Nov 18 at 21:22
  • @Kevin true, but my point was that investments (even very diversified ones) can easily lose money over one year. The answer implies that the strategy maximizes returns but makes no mention of risk.
    – D Stanley
    Nov 18 at 21:49
  • @DStanley: If you are retiring within one year, then your retirement fund should already be nearly 100% safe investments like bonds or CDs.
    – Kevin
    Nov 18 at 21:52
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    @Kevin Wouldn't having all your retirement assets nearly 100% in bonds and CD's at the start of retirement mean that you're predicting a very short retirement? You'd be losing out gains on money you won't touch for another 10-15 years. Average retirement is 18 years with some being as long as 30.
    – Kevin H
    Nov 19 at 19:45
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As someone who did almost the same thing, I would say no - there is no downside. We had lived in our former house for 20 years and paid off our mortgage last year. We, then, moved into a bigger house a few months later. This bought us time to make some home repairs and be able to purchase the new house with only 5% down. We bought the new house in Oct and didn't sell the old house until last March. (It's a long story on the large gap.) Anyway, the only downside would be if the value of the house you sell would cause you to pay taxes on the sale of it. We didn't have that issue.

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