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magicrobots
Level 1

prepay then refi on small loan vs. refi bigger loan with large downpayment

Hello!

I need help with the following situation and would appreciate some input:
I have 160k cash available
I have a 240k mortgage at a high rate (4.5%)

 

Should I:
a) pay down my mortgage immediately with 160k, then refinance on a 80k mortgage.
b) refinance immediately on a new 240k mortgage, using 160k as a bigger downpayment.
c) it doesn't matter

 

Thank you! Any help would be great!

2 Best answer

Accepted Solutions
Critter-3
Level 15

prepay then refi on small loan vs. refi bigger loan with large downpayment

First rule of thumb ... don't pay a $1 of mortgage interest if you don't need to ... the best you can hope on your tax return is 32 cents back ... not a good trade.   Now if you can invest the 160K and make more in earnings than the interest rate you need to pay for the mortgage then that is a valid reason to have a mortgage.  Sounds like sitting down with a local financial planner to go over all your financial options and goals would be your best bet. 

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NCperson
Level 15

prepay then refi on small loan vs. refi bigger loan with large downpayment

B) is better than A) - because Banks do not like making small mortgages and the rate / fees could be higher.  However, if you go Route B, understand that you are stuck with the same payment; the loan will just end quicker. 

 

 

But otherwise, it's a personal choice.

View solution in original post

7 Replies
Critter-3
Level 15

prepay then refi on small loan vs. refi bigger loan with large downpayment

That is a totally personal choice to make ... if you don't need that extra cash then go for it but don't short change yourself ... always leave a 4-6 month reserve for unexpected events. 

magicrobots
Level 1

prepay then refi on small loan vs. refi bigger loan with large downpayment

Thank  you - This 160k is extra liquidity -- sounds like you're suggesting option C.

 

I was asking mostly as I don't understand the tax benefits, or structuring a mortgage one way vs. the other in terms of how to get the best rate.

Critter-3
Level 15

prepay then refi on small loan vs. refi bigger loan with large downpayment

First rule of thumb ... don't pay a $1 of mortgage interest if you don't need to ... the best you can hope on your tax return is 32 cents back ... not a good trade.   Now if you can invest the 160K and make more in earnings than the interest rate you need to pay for the mortgage then that is a valid reason to have a mortgage.  Sounds like sitting down with a local financial planner to go over all your financial options and goals would be your best bet. 

View solution in original post

NCperson
Level 15

prepay then refi on small loan vs. refi bigger loan with large downpayment

B) is better than A) - because Banks do not like making small mortgages and the rate / fees could be higher.  However, if you go Route B, understand that you are stuck with the same payment; the loan will just end quicker. 

 

 

But otherwise, it's a personal choice.

View solution in original post

Critter-3
Level 15

prepay then refi on small loan vs. refi bigger loan with large downpayment

If it makes a difference in the rates or fees for the size of the loan then take the larger loan and then pay it down faster ... unless there is a prepayment penalty you can always make a principal only payment anytime. 

NCperson
Level 15

prepay then refi on small loan vs. refi bigger loan with large downpayment

there are no prepayment penalties - that was effectively outlawed after the financial crisis (I think that is an CFPB thing).

magicrobots
Level 1

prepay then refi on small loan vs. refi bigger loan with large downpayment

Thank you, this is exactly what I was looking for. Cheers

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