Pay Off or Refi?


Today TaxMama hears from Tom in the TaxQuips Forum with an interesting problem. “I have a $270,000 mortgage on my primary home.  It is a 30-year loan at 5 3/8% fixed. My home is worth substantially more.  Should I refinance at today’s rates? I could pay off the loan, but that would drain our resources.   Would it be better to add to the principal payments, or refinance for maybe a 10 or 15 year loan, or even a new 30 year (all fixed loans)?”



Hi Tom,

At 5 3/8%, I would, at the very least, refinance the loan. That’s not a jumbo loan in today’s market. And you have a lot of equity. So you should have no trouble getting a new loan at about 3.5% or a little less. That would instantly save you over $5,000 per year.  

Should you pay it off and tie up that much cash? Here is the smart investor question: Can you earn at least as much as 3.5% or more on that cash?

If you can earn more than that – definitely do NOT pay off the loan. One way you can earn that kind of money in today’s economy is by buying rental real estate. It is available at the lowest possible prices; and interest rates the lowest I’ve ever seen. Be sure you can find reliable tenants – residential or commercial. When you find good tenants, your move-out rate will be low, or non-existent; and your management at a minimum.

If you can’t earn more than 3.5%, then your need to decide what to do.

Of course, you could pay it off and get a home equity line of credit for $200,000 or so – and not use the equity until you need it. BUT, the interest on that equity line is apt to be quite high when you do want to use it. Probably more than the 5 3/8% you’re paying now. 

Personally, if I had $270,000 sitting around, I probably would not pay off the mortgage, if I could get a 3%-ish loan. What do you think? I would love to hear from TaxMama’s family.

And remember, you can find answers to all kinds of questions about refinancing and other tax issues, free. Where? Where else? At

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