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Guru_Guy
Guru_Guy, Lawyer
Category: Finance
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Experience:  30 years experience in stocks, bonds, tax deferred accounts, trusts, & tax issues.
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I need to borrow $15000.00. I have two options 1) ...

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I need to borrow $15000.00. I have two options:1) borrow it from a bank at 12.99% interest with the ability to pay it back over 8 years with no pre payment penality. 2) refinance a current 2nd mortgage with the $15000.00 as a cash out at 10% interest over 15 years. The closing costs for this option is $1400.00 and the balance refinanced including the $15000.00 would be $36975.00. I plan to pay the $15000.00 off in 3 years no matter which option I choose. Out of the two options, over the 3 years, whick one would save me the most money? With the bank loan, once the balance is paid, there would be no further payments. With the refinance, my payment would be elevated until the full balance was paid off not just the $15000.00. How would this effect my total repayed? Which option would be the best
Submitted: 8 years ago.
Category: Finance
Expert:  Guru_Guy replied 8 years ago.
Hello,


The better loan depends on your tax situation.

With that loan, you will pay a total of $3192.13 over the course of three years.

If you refinance your second mortgage, you will pay $1400 plus $2424.28 in interest (that is just the interest on the extra $15,000, not on the remainder). Therefore, the total cost of the money over three years would be $3824.28.

However, with the mortgage loan, you are able to deduct the interest on your taxes. This means you should "discount" the loan by your top tax rate. If you are in the 15% tax bracket, $573.64 in taxes. This means your total after tax cost of the loan is $3250.64. In other words, you still pay more than with the basic bank loan.

However, if you are in the 25% bracket, the mortgage would save you a total of 956.07 in taxes. This would make the total cost $2868.21, which is a small savings over the simple bank loan option. Although since the closing costs must be deducted over the full life of the loan, it might not be worth it anyway.

The other thing to consider is your existing second mortgage. If you are lowering that interest rate by refinancing, that would save additional money. If you are increasing your rate, that creates an additional cost.

The botXXXXX XXXXXne is that if you are in sure you can pay it off within 3 years, or are not reducing your rate by refinancing, go with the regular bank loan. If you may end up having to pay off over longer than three years or your mortgage rate will be lower than your current one after a refinancing, go with the 2nd mortgage option.

I hope this helps!
Guru_Guy, Lawyer
Category: Finance
Satisfied Customers: 2418
Experience: 30 years experience in stocks, bonds, tax deferred accounts, trusts, & tax issues.
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