Should I Pay Down Extra Principal To Qualify For A Mortgage Refinance?

You may want to pay down extra principal to qualify for a mortgage refinance. When mortgage rates are low, paying down principal to qualify for a lower mortgage rate is a smart move. The return on your capital could actually be quite high.

But when mortgages are high, as they still are, they paying down extra principal may be a suboptimal financial move. For now, most people have low mortgage rates after refinancing or take out new mortgages during the pandemic.

Let me share with you an example of when paying down mortgage principal to qualify for a mortgage refinance made sense. The guaranteed return on paying down a mortgage is the interest rate. However, that's not the end of the calculation.

Pay Down Extra Principal To Qualify For A Mortgage

A while ago, my 5/1 jumbo ARM refinance ran into a snafu. I was trying to refinance a 2.625% 5/1 ARM in its 5th year into another 5/1 ARM at 2.375%. If I let the ARM adjust after the 5th year, it would have adjusted to 3.375% or higher since the rate is based off LIBOR + a 2% margin.

The mortgage amount was $981,000 and I was paying $4,338 a month. Roughly $2,192 of the $4,338 monthly mortgage payment goes to principal.

If I were to successfully refinance to a 2.375% rate, my monthly payment would fall to $3,830 a month. $1,900 of the payment would go to principal. In other words, my cash flow would increase by $508 a month, but my monthly principal payment goes down by $292 a month.

I enjoy paying down principal every month because it's like a forced savings account. My goal is to pay off the entire mortgage by age 50 (2027), or 22 years after I first took the sucker out.

Once a mortgage is paid off, there's only one figure needed to calculate your net worth: the market value of the property. Just be aware there is a downside to paying off a mortgage early you might not realize. And that's a loss of motivation to earn.

High Debt-To-Income Ratio Makes Refinancing Harder

Unfortunately, I wasn't unable to proceed with my mortgage refinance due to a high debt-to-income ratio. Most banks have a debt-to-income ratio limit of 42%. With a $981,000 mortgage, I'm over that.

The irony is that if I were to successfully refinance the mortgage, my debt-to-income ratio would drop. This would make me more creditworthy because my income would go up by $508 a month.

With the combination of buying another property in 2014 and paying myself a modest salary from my online business, I just didn't qualify for refinancing the full $981,000 amount. Instead, I only qualified for refinancing $800,000.

The solution is to pay down principal to qualify for a mortgage refinance. In this case, I would have to pay down a whopping $181,000 in principal.

Tough Decision To Pay Down Extra Principal

Paying down $181,000 worth of principal was a lot. At the time, I only had about $190,000 in liquid savings at the moment. But if I were to pay so much down, my monthly mortgage amount would drop to $3,160 from $4,338. This would be a $1,178/month cash flow improvement.

Given I wasn't too bullish on stocks, real estate, or private equity over the next two years, I was thinking of paying down debt. Back then, I had normal investing cadence of $5,000 – $20,000 a month. Therefore, the chances of the $181,000 just sitting in my money market account for the rest of the year were high.

Finally, I had a 7-year CD coming due. I was also to receive my final tranche of deferred compensation as part of my severance package then as well.

If there is such a thing as being overly liquid, I'll be entering that territory if I don't pay down any extra principal this year.

Calculate The Return On Paying Down Extra Principal

The return I will receive on paying down extra principal in this case is the annual interest savings divided by the principal pay down amount.

For example, saving 2% on a $800,000 mortgage equals $16,000 a year in interest savings. $16,000 divided by the $181,000 principal pay down = 8.9%. A 8.9% return on $181,000 in principal pay down is a GREAT return.

Therefore, I decided to pay down extra principal to qualify for a mortgage refinance.

Things To Consider Before Paying Down Extra Principal

If you're considering paying down extra principal to qualify for a mortgage refinance, here are eight things to think about before making a decision.

1) Liquidity situation.

Ask yourself how much money in the bank makes you feel financially secure. The answer is different for everybody. I like having six months of living expenses in the bank at a minimum. The rockier the times, the more I want.

When you pay down extra principal, you don't lower your monthly mortgage payments. However, if you pay down principal to qualify for a lower mortgage rate refinance, then your monthly mortgage payments will be lower.

2) Upcoming purchases or expenses.

Do you want to buy another property? Will your car need replacing soon? Will you be having to pay outrageous private school tuition? How about upcoming medical expenses? If your monthly cash flow can't take care of your expenses on its own, then paying down extra principal might not be a good idea.

3) Investment opportunity cost.

In a raging bull market, you want to have as much risk-asset exposure as comfortably possible. In the 7th year or later of a bull market, having a balanced portfolio of stocks, bonds, and risk-free assets is more prudent. I just can't get too excited about anything right now. I Bonds are paying a huge rate.

4) Interest rate outlook.

There are two things involved with a successful mortgage refinance: 1) locking in an interest rate that makes sense, 2) passing the underwriting process. I was able to lock in a rate 0.125% off the all-time low I've seen for 5/1 jumbo ARMs.

I do believe interest rates will stay low for a long time. However, I just don't know whether I'll be able to time the bottom again. Here's my argument for why you should get an ARM versus a 30-year fixed mortgage.

The long-term outlook for mortgage rates is down. However, there are times when inflation may be elevated, which results in higher mortgage rates. We saw that in 2022. But long-term, mortgage rates will likely resume their downward trend as inflation comes down.

5) Real estate outlook. 

If you plan to own your property for the long term, it doesn't matter whether the real estate market is increasing or declining. But if the length of ownership is less than forever, then you need to make an educated guess on the probability of a real estate meltdown occurring during the window when you plan to sell.

If there's greater than a 50% probability, you shouldn't pay down extra principal. The reason is you may never get your money back.

Personally, I'm bullish on real estate long term. Mortgage rates will come down. Stock market money will flow into real estate, especially as more people realize how ephemeral stock market gains can be. Finally, a home is becoming much more valuable since we're staying at home way more often.

As a result, I'm actively investing in private real estate funds. I want to invest in lower-valuation properties in the heartland for more passive rental income.

My favorite platform is Fundrise. They were founded in 2012 and now manage over $3.5 billion in assets and have over 500,000 investors investing in the heartland of America. Financial Samurai is an investor in a Fundrise fund and Fundrise is a sponsor of this website.

Explore Fundrise

6) Income stability.

Should I Pay Down Extra Principal To Qualify For A Mortgage Refinance?

Do you have a recession-proof job? Or are you in a highly unstable and cyclical business? Everybody should refinance before losing their W2 income because you become dead to banks once you are unemployed.

At the same time, nobody should be tying up excess capital into their illiquid homes if their jobs is at risk. The more streams of income you have, the more income stability you have as a result.

During uncertain times, having strong passive income is more important. You can calculate your net worth all you want, but cash flow is more important.

7) Net worth composition.

Don't put all your eggs in one basket as the saying goes. If real estate accounts for significantly more than 50% of your net worth, consider staying liquid or using your capital to invest elsewhere.

The 2008 – 2009 downturn punished a lot of homeowners because more than 80% of median homeowners' net worth was in real estate. You can easily see a snapshot of your net worth composition if you aggregate your accounts with Empower. It is a free financial tool I've been using since 2012 to help grow my net worth.

8) Return on principal pay down.

During the previous housing crisis, a lot of people had to do a “cash-in refinance” to pay down principal to get their loan-to-value ratio back down to 80% or lower in order to qualify for a refinance.

Back then, the interest rate spreads were significant e.g. a homeowner locked in a 6% 30-year fixed rate before the crisis, but could refinance to 4% if they got their LTV down. In my situation, I'm only talking about a 0.25% difference not a 2% difference.

Because my cash flow increases by $1,178 a month or $14,136 a year if I pay down my mortgage from $981,000 to $800,000, I could say that my return on $181,000 = 7.8% ($14,136 / $181,000).

Or, I can take my old annual interest payment ($981,000 X 2.625% = $26,000) – new annual interest payment ($800,000 X 2.375% = $19,000) / cash-in amount ($181,000) = 3.8% return. Or I can simply calculate the return based on the interest rate I am refinancing = 2.625%.

2.625%, 3.8%, and 7.8% returns all compare favorably to the current risk-free rate of return of ~1.75%. The question is whether you're willing to take more risk to get an even greater return.

Always Do The Math Before Refinancing

Everybody should come up with a debt pay down plan. Once you have a plan, you'll figure out ways to achieve your goal. My plan is to be done with this originally $1,220,000 mortgage by age 50. If I pay down an extra $181,000 in principal to qualify for my 2.375% rate, I'll have 11 years left to pay off the remaining $800,000 balance.

I have zero regrets paying down an extra $200,000 in principal on a rental property in 2014 and 2015. It's now mortgage-free and I couldn't be more satisfied.

Some people have said it's unwise to have so much capital locked up in one asset. That's true if the asset accounts for a significant portion of your net worth. This rental property is less than 15% of my net worth, and will hopefully continue to decrease with an increase in the overall pie.

If you can, it's worth paying down extra principal to qualify for a mortgage refinance. You won't regret paying down debt and lowering your interest cost as well.


Shop around for the best mortgage rate. Check the latest mortgage rates online. You'll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free mortgage rate quotes you can get, the better. This way, you feel confident knowing you're getting the lowest rate for your situation.

Invest in real estate more strategically. If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.

I've invested $954,000 in real estate crowdfunding across the heartland of America since 2016. I earn income 100% passively so I can spend time taking care of my kids instead. Sign up and take a look at what Fundrise has to offer.

Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

For more nuanced personal finance content, join 65,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. 

65 thoughts on “Should I Pay Down Extra Principal To Qualify For A Mortgage Refinance?”

  1. I hadn’t thought of this type of scenario before, but I see the benefits. Refinancing at the best rates isn’t always easy, so I can see why you’d want to pay down extra principal to qualify for the best mortgage rates on a refinance. Thanks for the insights!

  2. Sam, your posts about home ownership and mortgages have been very inspiring, and extremely helpful especially since we’re trying to buy our first home!

    We’ve been considering 5/1 and 7/1 ARMs as well partially based on you opening our minds to the option, especially since we see the first place we’re buying as a “starter home” to be able to save up for something more permanent (or potentially even leave the Bay Area) in 5-10 years once we have kids and need more space (no point spending more on a mortgage now for more house than we need in the foreseeable future).

    This post of yours has got me worried though – when re-financing do they consider your current mortgage as part of your debt-to-income ratio? I was under the impression that they look at your monthly fixed payments (mortgage, car loan, student loans, CC, etc.) as a ratio of your monthly income – and not your full remaining debt balance? Given property prices out here while we’re comfortable with monthly mortgage payment amounts, I’m concerned that if your borrowing ability is based on total debt to income and not periodic payments, that we’d never qualify for a refinancing once we have this mortgage, should we need to once the 5 or 7 years is up. So should we just go with a 30 year fixed as an insurance plan if we decide to stick with the property for the long haul??

    1. The bank looks at everything. And the irony as I pointed out is that everything is fine, and my D/I ratio would go DOWN since my mortgage payment would go down ~$500/month.

      The variable here is INCOME really. I screwed up by paying myself less in Jan this year, making them wonder if my income is variable not fixed. Also, I took on ~$750K more in net debt in 2014 when I bought another property, which also doesn’t help my qualification process.

      So long as your income is stable/same, and you haven’t taken on much more debt, you should be fine to refinance.

  3. I just went through this in a similar situation, but on a HELOC. I have a first that we owe about 305k (1500 payment) on, and a HELOC that we owe 145k on. The HELOC is an I/O, and our intro period is up. It was 1.75% and just jumped to 4.5%. So I’m taking 90k from an Amex online savings account that is earning .90% to pay it down so we will only owe 55k on it. I then plan to throw 4k a month at it for the next year until it is paid off.

    My concern about depleting my cash I got over because I still have a 9 year draw period left on it if we needed it for an emergency. Also- our house is only 1.5 years old, we bought it new, so no real unexpected expenses coming.

    After paying it down with the remaining 55k left, our total mortgage balance is around 360ish and our home appraised last year for 750k (San Diego).

    I’m not too concerned with our HELOC being capped as we are easily below a 50% LTV all in.

    Between my wife and I we have around 18-20k a month in gross income, both right at 30 years old.

    Next goal is to buy a rental in the next downturn, as we will be in a good cash flow position and with our first being so low we could carry multiple mortgages if need be.


      1. Had 15k in builder incentives to use their financing at time of purchase of our home in 2014, but was on a jumbo (4.375) loan of 495k amount financed. (Even with 30% down and 750+ credit). Had to keep it open for 11 months then refi’d. Took out the HELOC with intention of paying it off quickly but wanted to take advantage of the low rate of 1.75 for 6 months, and got our first down to a 320 balance at 3.75 on a 30. Our HELOC has more available on the LOC, but we paid 40k down at time of refi, and didn’t tap it out.

        Main reason for the HELOC was so that between cash and HELOC we could go in cash on a rental up to 225k or so, and then take a mortgage out on the rental and pay the HELOC back off.

        The ability to go in as a cash buyer on a inexpensive rental in my opinion is worth the head ache of the HELOC.

  4. Frank Facts

    Loved the all eggs in one basket point. It might feel good to pay down a mortgage, but if it’s all you have, then that’s no better than waiting!!

      1. The MAD Consultant

        When I see that comment it immediately stirs the contrarian inside me. If rates have been going down for 35 years why would they continue to go down? Obviously the exact time frame of when rates will start to rise is very hard to predict, but it seems to me that after years of 0% rates by the FED the new trend will be up(albeit a slow one right now). While negative is a possibility at this stage it seems highly unlikely yet not impossible. In my OPINION i think the next few years will be the last time we will all have a chance at very low rates for property. The flip side will be that higher rates will exert downward pressure on real estate prices. I have written on the subject a bit myself. If you’d like I can share it here or via email. Contact me and let me know what you’d prefer out of respect for you and your blog.

        1. The great thing about this debate is we’ll know every moment and every year who will be right. And we can act accordingly and also see who is right or wrong. Folks have been coming here thinking this is the year rates will rise for the past seven years. I’m sticking with my lower rates for longer thesis, which is why I’m unwilling to lock in a 30-year fixed rate.

          Have you borrowed via a 30 year fixed? If so, when did you take it out and start believing rates would rise?

          1. The MAD Consultant

            So true. It’s why I love finance myself.

            I went with a 30 year fixed when I bought in late 2012. I looked at a 5 year ARM(2.75 I believe) which would have put me at 2017 to make a choice. At that point in time my fixed rate was so low(3%) for my situation I felt the odds of getting an even lower rate in 2017 were not good. I’m correct so far as rates quickly went up after my purchase in 2013. Unless they continue lower into 2017 the choice for myself will be correct. Although they are getting closer to that level, at this point in time I feel it will be much harder to reach that area again. But If I did have an ARM I’d have to be confident that rates will still be this low in 2022 if that were the position I put myself in.

            I started to change my mind on the longer term trend over the last 6-8 months. Doesnt mean the change is immediate. Just that the window is slowly closing. Back when I bought in 2012 I felt the intermediate trend was about to change, but still felt that there was a few more years of relatively low rates bouncing around in a range. I don’t see the same scenario playing out again.

            Just so there is no confusion. I’m not against ARMS, fixed, or any other type of financing. They all have their advantages for each individual person and time period.

  5. Less debt is always good, but liquidity is also important. Normally, I would always say pay down the principal, but if you don’t have good other sources to manage your cash flow you need to pay attention to that first. It goes without saying that these are high quality ‘problems’! :-)

  6. A couple questions:

    For your consideration#5, Real estate outlook, how does paying down principal affect whether or not you will get your money back if you sell while the price is low? If you’ve paid down your principal and then sell at a loss, aren’t you just taking the loss up front. Conversely, if you don’t pay down your principal, are you eventually going to have to repay your loan?

    RE your poll: If you’re excited about a 7% return for P2P lending, why wouldn’t you just put the money towards that. Its more liquid than real estate and certainly a better return. Any risks your thinking about?

    1. 1) Optionality. You may live in a non-recourse state where if things get really bad, you can just hand in the keys without the rest of your wealth being affected. Try not to throw good money after a bad asset. My house is a good asset IMO, which is why I don’t mind paying it down as I want to keep it forever.

      2) 7% is nice, but there are never guarantees. Paying down debt is a guarantee.

  7. The real question IMO here is what is the value of liquidity in today’s market environment and what’s liquidity to you. There is not much return in risk free yields and a lot depends on your outlook in the stock market.

    I tend to value having additional cash availability and the returns outlined don’t meet my needs for a savings benefit to reduce liquidity. I would take the higher rate and look for other opportunities for the cash.

  8. I am late to the party, but I voted to pay the $181,000. If I were in your position, I would be OK with the involved risks because I don’t mind betting on myself. The worst case scenario doesn’t really scare me much either.

  9. Gen Y Finance Guy

    $180K is a lot of dough to bring in to refinance, but like you I don’t see much that excites me in this market and am also in the middle of a cash-in refinance that is set to close next week.

    We didn’t have any issues with debt ratios but we had to bring in enough cash to get us to an 80% loan to value ratio. When we started I thought that was going to be about $7,000 based on comps, but then was educated that the loan on our solar (a self sufficient and productive asset) would be counted as a 2nd mortgage.

    Therefore we are actually going to be required to bring in about $22,000 to pay-off the solar loan of approx. $15K. This only eats into about 20% of our savings liquidity. That still leaves us with about 6 months of living expenses.

    It would be very hard for me to have less than a months worth of living expenses in the bank.

    However, you did mention that it would motivate you to turn your hustle muscle into high gear, so that might be a good decision. Seems like you thrive in the hustle.

  10. Side note that probably is worth clarification. Although you are correct once your mortgage is paid off your home’s value is the figure to add to your Net Worth, I have always considered this to be the proper equation when it comes to home value in your NW calc: (Paid for home – closing costs – commissions – long term capital gains(if applicable)).

    I’m 1 week into the process of selling my multimillion dollar home that I’ve done well on and the number I add to my NW is a big difference if I just consider its value vs. what the actual net transaction would be. Capital gains is a great problem that very few have since there is the $250k/$500k deductions, but especially people selling their primary residences in HCOL areas like SF it definitely will come into play.

    My answer to your original question you probably already know since I’ve said it before…just pay the whole damn thing off. I get that I’m foolish financially that way, but I just find life more relaxing with zero debt…but would never judge anyone for taking advantage of the leverage a mortgage gives you.

  11. Mr. FrugalInAr

    I would find a bank that will simultaneously place the 5/1 first mortgage + a heloc at $150-200K+. The heloc will ease liquidity fears, banks should be more flexible with underwriting as well.

  12. The forced savings account makes sense, but savings accounts are 100% safe, backed by the government. Fast forward to when you have the house paid off – are you worried about having so much of your worth tied up in one ‘savings’ account?

    Most people in California don’t pay for earthquake insurance because it is so expensive. But if they are using their mortgage as a forced savings account, it is a very risky one. It can all be wiped out.

    If you have earthquake insurance and have the house paid off, do you think it’s going to be easy to collect if there is a big earthquake? I would much rather have a bank in my corner that owns 70% of the house and has a team of lawyers.

    Curious to hear if you think there is anything to this?

  13. PatientWealthBuilder

    I voted “other” Have you considered refinancing the $800,000 through the bank and then using private funding for the other $180,000? Or some part of the $180,000? By leveraging your night net worth contacts I would guess that you could find someone who is in a similar situation as you: hoarding cash in a CD. (I hate CDs!) You could approach them with your situation and ask if they would rather make 2% on their money lending to you for 5 years than whatever crap return they are getting on their CD. If you did this it would really make a lot of people happy: You, your investor, the bank, and everyone out there who has been put into a ridiculous situation by absurd bank lending standards – such as your situation where if they give you the refi without the down payment it actually gets your debt / income to a better place. The private funding route is a little more legwork but I think it would be fun to do and you could write a post about it later too.

    1. It’s an idea, but you can make ~2.4% risk-free in a 5-year CD right now.

      Besides, I will never borrow money from any friend or acquaintance. It’s just not good for relationships.

  14. Hey Sam, nice post and thoughts. I voted to pay down the $181,000. Yes, it helps get you a better interest rate and will help in the long run. I think the best reason is that you will be paying down debt. Everyone wants to have less debt right?


  15. Hey Sam, great article – I’ve been reading your blog for 3 years now and have learned a ton so thanks for all the free advice! Quick question, which bank are you locking that rate in with? I haven’t seen anything below 3% but perhaps I’m looking in the wrong place. Are you getting a special rate because of having such a strong relationship with the bank? Thanks!

    1. Jumbo good credit rates (especially ARMs) now are slightly cheaper than agency loans for owner occupied mortgages. Banks must be getting ‘free’ money from Treasury. Last time (Feb 2016) we had jumbo refi with Chase, the amount came as Wire from US Treasury – which threw closing/title company off for couple of days (outside closing Co, not Chase in house agency)

      Chase Private Client can give best rate they have in their sheet. Currently 7/1 jumbo ARM is about 2.5, while 5/1 ARM is 2% (yup no typo!), with about 1% points. Now, if you can get a competing worksheet or GFE (hopefully without any points), they match to waive those points!! But you are still on hook for closing costs!

      Sam: you prolly know this, qualifying for 7/1 is a bit easier as rate is qual., whereas, for 5/1 , you are most-likely qualified based on what could be max rate on your 5/1 ARM highest rate (7.375% ??), thus affecting DTI limits.

      One thing unsure is your case is Rental Refi, all I mentioned was for owner occupied. Not sure equation for investment/rental property.

      Going back to our 7/1 ARM refi, if you have 30% equity, interest-only payments possible for first 10 years., also waived escrow!! (With 25% equity, all of the above can be achieved, with 1/8 points)

      Thx SC

      1. Good to know. If I fail with this mortgage refinance, I might just try Chase as a Private Client. But if I am to move all those assets over, I have a strong belief that Citibank will make this happen at the end.

        I’m at 2.375% 0 points.

    2. webbersworld

      Jon –

      Wells Fargo is currently offering me 2.375% on 5/1, 2.5% on 7/1 and 3% on 10/1.

      Citizens Bank is currently offering me 2.375% on 5/1, 2.5% on 7/1 and 2.625% on 10/1.

      1. Any points? What are the fees and which one are you doing?

        Looks like my 2.375% rate could be more ubiquitous than I thought! Mine is 0 points, $3,100 net in fees if I transfer over my Ira.

        1. webbersworld

          Sorry, should’ve offered up more details.

          No points for any of the options. Wells is offering me about $1000 credit + $500 gift card for the 5/1. The fees would be about $1800.

          I’m leaning toward the 10/1 at 2.625% with Citizens.

            1. Sam, if you have the Wells contact details from the reader; can you also send it to me. My current 30 FRM is with Wells so I am hoping moving to 5/1 ARM saving 1% is worth it/

  16. I voted yes, to pay down the principal. It sounds like that puts you in a bit of a cash crunch. But considering you have a CD coming due early next year, hopefully that is a short-term problem. It also seems like you are a bit concerned about the adjustable mortgage rate. Have you considered taking a fixed rate and locking in at the current low rates, instead of riding with the libor? My thoughts are this is just another way of removing any future uncertainty with interest rates.


  17. The bank sure is asking for a lot. It’s too bad they haven’t offered a middle ground solution or maybe they still can. You make a lot of arguments to just go ahead and do it but it’s gotta be tough to part with so much cash that you weren’t planning to.

    I had to pay off one of my mom’s loans in order for her to get approved on her refinance. It was a lot for me to just hand over to her since I probably won’t get it back, but it was significantly less than what your bank is asking. I suppose it’s all relative though since her refinance amount was also a lot lower at around $300k.

  18. Several questions of clarification:
    1. Are you factoring your maturing 7 yr CD and your final severance payment into your $190k liquidity figure or are those in addition to current liquidity? ~$9,000 in liquidity post-refinance has to be a little scary with your expenses being so high.
    2. If you proceed with paying down principal, would you continue to target any additional funds toward aggressive mortgage pay down now that you’ve taken a $181,000 step forward or would you exclude mortgage pay down from consideration with new capital, focusing on other opportunities?

    I voted Yes because it’s not my money or my risk and in theory, it sounds prudent considering you are scheduled to adjust in a year anyway. However, I would have well-fleshed out scenarios for both of my questions and any others that you receive on here before pushing nearly $200,000 into a deep freeze.

    On a smaller scale, we refi’d out of a 4.625% 30 yr with PMI into a 2.875% 7/1 ARM and threw down an extra $11k in principal to wipe out the PMI last May. At the time, that $11k was approximately 85% of our liquidity and we had not funded our 2015 post tax retirement and had another $12,000 in grad school tuition to pay for the rest of 2015, plus three more $5,100 tuition payments in 2016. It was TIIIIIGHT for the remainder of 2015 and early 2016, but we planned and made smart choices with our cash at the micro level for the next 10 months after pulling the trigger and wound up with good macro results, finally feeling the squeeze subside in late February. I’m so glad we went through that pain now because we have a great rate, more equity, more cash flow and we were able to fund grad school and the post tax retirement all with cash to spare. I know you will also make good micro decisions over the next year or two after doing this so I am in favor. Good luck!

    1. Kendall,

      Good questions. The details, I purposefully left out as I felt it might overly sway the readers into voting “YES.” What I’m actually seeking is more reasons why I SHOULDN’T pay down $181,000 in extra principal.

      1) No. The severance payment and expiring CD is beyond the current $190K liquidity. The combined total of both severance and CD will be roughly $400K + $190K currently liquidity + perhaps another $120K+ I will save from now until then from cash flow. I’m thinking ahead of how I plan to spend / invest the money. I’ll write more about the CD and severance tranche when they come due, but not before. The think is. If I ever want to buy another property with 100% cash, I would need closer to $1.2M here in SF.

      2) Probably not for a year. I’d feel satisfied knowing an extra $181K was paid down, and ~$1,900 a month was paid down automatically through my new amortizing 5/1 ARM. Maybe not until 5 years when the lock adjusts again.

      Thanks for sharing your experience. Sounds like you are happy with your decision!


  19. When I look at the situation, I would say: make the extra 181 000 down payment. You will benefit from another good mortgage rate for the next 5 years.
    Cash flow wise, you will be building up quite fast a new pile of cash for your liquid assets and you will have cash ready to invest in the down turn.

    That being said, if the next big correction would happen, it is very likely it will only reach the bottom some 6-9 months from here. By then, you should have the cash to invest.

    We will be doing something similar by reducing heavily our cash pile. We will pay down about 15pct of the mortgage, even if the yield is only 1,14 on that. It beats in any case the current interest rates in Belgium: 0,11. The cash is actually labeled as emergency fund. We are sitting on a bigger than needed fund (lets hope no major curveball hits us the next years, I will otherwise regret saying this out loud). We will rebuild slowly by saving the lower payment we need to make.

    When a big investment opportunity comes along, we still can jump in.

    1. You are right about being able to build up a decent cash flow over time again, especially with a final severance payment and CD coming due in 1Q2017. But it’s always a little uncertain the first couple of months when you draw your savings down close to 0.

      Folks should read: Pay Down Debt Or Invest? Implement FS-DAIR

      I’m going to re-read the article. It’s all about establishing a framework for doing both based on returns and interest rates.

      Nice job paying down your debt!

      1. The uncertainty that comes with a close to 0 savings is indeed not comfortable. Can you find a way in the middle. Something like a short term loan until the severance pay comes in? or setting up an extra line of credit to drawn on between now and the 2017 pay?

        Thx for the pointer to the article. IT is a good start to decide on what to do.
        With our mortgage structure, I have 0 flexibility and need to pay each month a contractual amount. IT is fixed at the start of the loan.

  20. Genie Trombly

    Another option is to consider is giving yourself a temporary raise and come up with a smaller pay-down amount. Simply increase your monthly pay to yourself for 2 months.

    You would need to postpone your refinance for 2 months.

    My understanding, the banks ask for 2 months paychecks, 2 months bank statement and 2 years tax returns, no? They don’t go that far back in time.

    You always have the option of returning to the smaller salary after your successful refi.

    1. It’s a good idea BEFORE going into writing. Now that I’m in underwriting, they ask “why did you give yourself a raise? is your income variable and dependent on commissions?” etc. They want to see a steady, healthy paycheck for at least 2 months, and a high enough paycheck the two years prior.

      The problem is the rate right now is higher than 2.375%, so waiting 2 months from now would likely not match the rate I have locked now. I’m going to pressure them to extend for another month so they see another month of strong income. I’m in no rush!

  21. It certainly makes sense to pay down more now to lock in the lower rate. Although taking a huge chunk of your liquid savings is a scary thought, it’s simply a cash flow situation.

    What I would suggest is to sign up for 0% purchase APR credit card after your refi is approved and closed and put all your purchases on there. There are currently offers for 12-15 months from several major credit card issuers, enough to tide you over until you CD and your severance hits. Skip the balance transfers which come with a hefty fee and focus only on financing new day to day purchases. You can make the minimum payment and keep the extra cash as a buffer/rainy day fund. Yes it’s one month of hurt but one solution to quickly get your liquidity up fast and free.

  22. Sam:

    You know you are addicted to serial ReFi – making you a ReFi who-e, that is. How can you pay yourself “less” w2 last year knowing a future potential ReFi is going to come due! At this point — either you can get married – get your spouse to have some W2, or work with a private banker types who can stretch it upto 50% DTI. Or pay one time 1/8th or extra points to extend the lock for extra 30 days, and get real W2 job until you cross the ReFi bridge (and usually until 2-6 months beyond closing)


    1. It may seem I’m a serial refinancer, but I haven’t refinanced anything since 2012. I’ve just been writing more about the topic since the beginning of the year when rates dropped again, and am currently sharing my journey.

      It would be great to get a never ending lock. I’m going into the 3rd month of this lock that was supposed to expire mid April. Perhaps they can just push it for one more month at their expense, I don’t mind since I have 12 more months at my current rate, and it will show one more W2 paystub at a high amount.

  23. Kirk Taylor

    This is anther great article. Financially you have your shit together so by all means, use your cash savings to pay down principal, REFINANCE!

  24. I’d say you can always put some unexpected expense on a credit card to tide you over until you have more cash flow.

  25. The Green Swan

    I wouldn’t be worried about the interest rate environment. I see us being in a pro longed low interest rate environment. So you can give yourself sometime and not have to feel like you need to refi asap. Also would another option be to start paying yourself a higher salarie from your business again to help you qualify for a larger loan amount or is that not an option? Interesting scenario. Good luck!
    The Green Swan

    1. That’s an option, and what I did once I realized I was refinancing in February. I paid myself more in feb and March, and that still wasn’t enough, so I paid myself 2.5X more in April. But the one January payment ~$1,200 below my monthly average in 2015 really tripped me up.

      For those who think they’ll be refinancing and have their own business: never pay yourself less, even though you can make it up with a year end bonus. Always just pay yourself more.

  26. Having recently been through a very similar situation I say do it on your terms, don’t be forced into doing something unless you are 100% ok with it. Even with the lower dti/ltv they may still find another excuse if the loan has become uneconomic for them to do and wasted even more of your time.

    They probably look at 2 months income and last years so you could revisit in a few months too if you want to hold on to your cash.

    If it’s a relatively small portion of your very liquid net worth (to me cash that could be available to spend in a week) maybe go for it to take advantage of the rate. And since you’ve stated your goal to pay off within around 10 years this will give you a head start as well. Just try to get assurances underwriter is good to go if you put the money in.

    1. No money will be sent to pay down if the mortgage doesn’t get refinanced. Not to worry.

      The problem with trying again in two months is that there is no guarantee the 2.375% interest rate will still be there, and I will have to resend all my documents, which is not that big of a PITA b/c I’ll be resending most of them anyway.

  27. Financial Slacker

    For me, the key determining factor is whether you are comfortable with the stability of your cash inflow relative to your cash outflow.

    In my case, having multiple years of living expenses is important due to the volatility of income streams and the high inflexibility of cash outflow needs.

    Sounds to me like you are relatively comfortable with your liquidity after a pay down. Plus you have additional liquidity coming in within the next 12 months.

    And without any other strong opportunities to invest the funds, I would say it makes sense to pay down the mortgage.

    1. Multiple years of living expenses is a lot. What do you do?

      I’ve had one month of savings in the bank to currently about 20 months of savings (hoarding cash due to negative outlook).

      Do you see any great opportunities to invest?

      1. Dave @ Financial Slacker

        Not to diverge too much from your post; but,

        After 20 years of working in health and managed care, I am now consulting for healthcare companies. The cash inflow is inconsistent. I do have other income from commercial mortgage underwriting, but it can also be inconsistent.

        One of my largest and most important expenses is private school. I am thinking about investing the cash into CD ladders (or zero coupon CABs) with maturities that coincide with the tuition due dates.

        I started a business at the beginning of the 2008 recession. It was slow going and as a result, I remember the stress of having cashflow concerns. As I develop additional income streams, I’m sure I’ll get more comfortable having less cash on hand.

  28. What’s your business structure? LLC?

    Personally, I’d pay the extra principal, but I’m wondering if purchasing the property through your existing or new business entity rather than individually was feasible and would bypass the debt-to-income issue.

    I’d expect you’d get a higher interest rate, but at your scale the benefits of holding your real estate inside a business entity start getting more interesting.

      1. Is the bank only looking at the W2 income? If not, couldn’t you just give yourself more distributions?

        Why did you take less income this year?

        1. To pay less self employment taxes. I can always give myself a large bonus year end if deemed necessary. I like having optionality.

          I basically spend 0% of my online business income because I have ~$200k passive income, which also isn’t fully spent. I pay myself because the IRS says I have to so they can collect self-employment income.

          You have to give yourself the income that can pass before the underwriting process begins, otherwise the underwriter will see and suspect that you’re just manipulating your income to get the mortgage. They do not want to see variable income but a steady income that keeps on going up up and up.

          1. I’ve always wondered what an acceptable W2 salary for business owners might be; low enough to save on taxes, but high enough to be defensible to the IRS. If your title was blogger, then a W2 income of $25k might be passable, but with a title of CEO you’d have to be much higher.

            If your business income is rising I would have thought you’d need to increase your W2 salary too.

Leave a Comment

Your email address will not be published. Required fields are marked *