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!
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!