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You are worried about paying interest while money just sits there, and piddly things like non-deductibility of points, etc. Whan you should be focussing on is "what if something goes wrong?" You should be focussing on risk first & foremost, not taxes and not low earnings on cash.

I think it's my nature to worry about the small things, but I am the queen of contingency plans, and think I have the bigger things in hand.

If things go pear-shaped, you'll be in the position of a number of people I have seen in our area. Old house gets a realtor For Sale sign in the yard, then a few months later a sign from a different realtor,......then a different one.....then BOTH houses get a For Sale sign, and they move into whichever house doesn't sell.

The plan I presented allows us to afford both houses exactly because I have seen the situation you describe. I don't want to be there, and having a higher mortgage payment as I do now seems to be riskier than replacing it with one that is about a third the size.

So how would you do it? Sounds like you would sell the existing house first, move some place else temporarily, and then build. I don't want to do that, and seem to have found a proposal that accomplishes my goal, is affordable for the long term, and doesn't leave us broke or more stressed.

I'm open to suggestions, but just telling me that it's too complicated didn't offer an alternative solution, which I would certainly welcome and find helpful.

I do realize that you don't know my entire financial picture, and so have to make some assumptions there, so I can't blame you for assuming that it is a house of cards, and one small wind will bring it down. Got a better alternative to simplify it as you suggest needs to be done?
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