I have a mortgage loan for 703K at 2.875 interest (7/1 ARM, still 6 more years left) - I am paying $2988
I have HELOC for 90K at 5.25 variable rate, i am paying $370 per month (interest only)
I have two options now
1. Merge these two loans into one and get rate of 3.125 for 5/1 ARM, my new monthly payments will be $3420
2. Refinance only the HELOC for fixed rate at 5.09 interest (for 10 years), new monthly payment will be $958 (principle and interest). Then my combined monthly payment will be $3946
If i choose option1, i will pay $117,500 in next 5 years and this is all tax deductible. I will have to pay $2200 closing cost. So, total amount is $119700
If i choose option 2, i will pay $95,715 interest on first loan + $18,195 interest on the second loan ($113910 combined interest). Only $95,715 is tax deductible.
So, the difference between two options is, i will be paying $5790 more if i go for option 1.
Now, the question is am i going to save more than $5790 in 5 years in taxes if i go for option 1 considering we fall in high tax bracket?
Important points to note:
- Currently we do not have tax deductions on second loan, we never know if this will change in next few years. If it changes option 2 seems to be more beneficial
- If i go for option 1, i will loose the 2.875 interest rate for the entire loan, as well as i will loose that rate for the sixth year too. If i go for option 2, i can have 2.875 interest rate for large loan for another 6 years.
Please let me know your thoughts