Q&A: Is it better to pay down my current mortgage and refinance or refinance and use the money for downpayment?

Question by mks6128: Is it better to pay down my current mortgage and refinance or refinance and use the money for downpayment?
I have inherited some money and I want to use it to pay down the debt on my house and to make the payments lower. Would it be better to pay the mortgage down $ 100K and then refinance the $ 75K balance or Should I refinance the $ 175K and put a downpayment of $ 100K? Maybe it would be the same difference, but I just wanted to make sure I am using this money in the best way. Thanks!

Best answer:

Answer by Adam L
Depends. Here are some things to consider:

1) If you refinance, you will drastically lower your payment, but it will still be 30 years until you own your home. If you need to reduce your bills now, that may be a good option.

2) If you pay down, you don’t have to pay closing costs on a new loan, which could be significant. However, you will still have the same monthly payment you have today.

3) Another option would be to invest the money in long-term CDs or bonds. Depending on your mortgage rate, the CD or Bond could pay you better than downing your debt. Just use the monthly interest payments to help offset your housing payment.

For most people, investing the money is wiser than downing a tax-deductible mortgage that you are paying 6% on.

There is a link to a google spreadsheet below that will help calculate your options. Sheet 1 assumes you refinance, Sheet 2 pays your current mortgage, and Sheet 3 invests in a CD.

You can change the investment assumptions on the right, and the sheet will automatically recalculate. Just below the assumptions is a synopsis of your situation in five years.

Sorry, but the amortization chart only goes to 97 payments because google spreadsheets only gives you 100 rows. I could have done better in Excel.


What do you think? Answer below!

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6 Responses to Q&A: Is it better to pay down my current mortgage and refinance or refinance and use the money for downpayment?

  1. beachlover says:

    would say look at your rate now if its an adjustable rate refinance at a lower rate and if i where you i would put the 100k in a stable investment that has nice return and use the earnings to pay additional money on your mortgage each year.
    100k should at minimum pay you 5% on your money so take out gains and put them toward your mortgage it will shorten the time you will payoff the mortgage.

    rule of thumb if you pay an additional 100$ on your mortgage seperate checks and the 100 dollar one put apply to principle your loan will pay off in 20 years aprox

    if your rate is above 6.5% look into refinancing it wouldnt hurt.

  2. Don says:

    Unless you are having a hard time making your current house payment you would be better off investing your 100,000 in a good mutual fund and leave your house alone. Remember your interest is deductible, your house will appreciate on its own. If you ever ran into hard times you could always pull the money out of the mutual fund but the only way to get it from the house would be to sell the house. Mortgage companies would not refinance or give you a second mortgage if you did not have a job or way to repay the loan. The money wisely invested in a good mutual fund will return a much better rate of interest than the appreciation of your home.

    Good Luck.

  3. worship says:

    I all really depends on the rate thet they offer you. I f the rate is unimpresive and high. I would just say to pay down the debt on the house and refi. Right now is not the time to buy it is a gooe idea to improve on your home if that’s what you want.

  4. DJ B says:

    You might consider seeking professional advise from a tax advisor. While putting money into your home (real estate) has traditionally been a sure bet for increased equity, in today’s market you may want to re think that. You might gain better equity by investing in other things, or something less risky for awhile until the market stabilizes. But please, get professional help! We love to answer your questions, but think about it , we’re “Yahoo’s”! What does that tell ya? LOL

  5. marhasani says:

    I would choose to refinance and then use the money for down payment. It makes more sense to divert to the premium instead of the interest. A potential lender will see that you have assets as well as cash on hand. You may want to look at the interest rates for your particular market.

  6. Yanswersmonitorsarenazis says:

    It’s really pretty much the same thing. Either you bring cash to closing, or your payoff balance on your existing mortgage is smaller. 6 in one…

    More importantly, shop around for the best loan terms you can get. With that much money down, perhaps you can even shorten your term to 15-20 years (20 years saves you tons of interest for not that much more monthly, and usually a little lower rate too).

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