LOC vs mortgage

[Jeremy D.]

Hi everyone,

I'm in the process of refinancing a mortgage and would like to hear your opinions on these two options.

For illustration purposes let's say the mortgage balance is $30k and I'm going to refinance it into either a LOC at 6.25% or a 15 yr note at 5.5%. I am leaning towards the LOC because I can set that up as a sweep connected to my checking account. I like to keep about $30k in the checking as a reserve. If I refi as a LOC then I'll pay off the $30k immediately and keep $0 in my checking account...but use the LOC as a reserve by utilizing the sweep. The alternative is to refi into a 15 yr note and still maintain $30k in cash reserves. But I see that reserve balance as costing me 5.5% per year which is the rate on the note.

So I guess in summary there are two options:

Option 1

Maintain a $0 cash reserve and have $30k available in an LOC for reserves at 6.25% when i need to draw on it.

Option 2

Maintain a $30k cash reserve and be paying on a $30k 15 yr mortgage at 5.5%.

Option 1 will cost $0 in interest in year 1 and option 2 will cost about $1,600 in interest

Thoughts?

[Jesse Gonzalez]

Option 1

Maintain a $0 cash reserve and have $30k available in an LOC for reserves at 6.25% when i need to draw on it.

Option 2

Maintain a $30k cash reserve and be paying on a $30k 15 yr mortgage at 5.5%.

Option 1 will cost $0 in interest in year 1 and option 2 will cost about $1,600 in interest

It's hard to say without finding out exactly what you're looking to do with the LOC, but option 1 will clearly save you interest payments, assuming you don't always owe the 30K on the LOC incurring the highest interest payments more often. The only downside I see with the LOC is that it can be frozen by your lender or reduced as they see fit. If that occurs then you would be forced to refinance in order to get your 30K out of the property. Assuming you have alot of equity in the home the odds of that happening are pretty slim so you can see it's hard to answer the question without getting more info.