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

[magicrobots]

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!

[Critter-3]

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]

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 · Accepted solution]

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. 

[NCperson · Accepted solution]

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.

[Critter-3]

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]

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

[magicrobots]

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