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Which Loan Scenario is better - Large Down/Large Prepayment?

Assumptions: 400K home price, nominal 20% down, 30 year fixed

Scenario 1:
Down: 40%
Interest Rate: 5.25%
Loan Amount: 240K

Scenario 2:
Down 20%
Interest Rate: 5.25%
Loan Amount: 320K
Prepayment in the first five years: 80K

Under this scenario, I want to understand which one would be financially better - we can assume that closing costs are the same for both. The way I look at it, scenario 1 reducing the loan principal upfront but the loan is assessed for 30 years while scenario 2 has higher starting principal but with prepayment, the effective loan period is reduced from 30 to lets say 20 years. Running the numbers, I get a lower total cost of interest on scenario 2 than scenario 1.

Is this reasoning correct? Any thoughts/opinions are highly appreciated.
by Bubbley17 from , . Aug 4th 2009 Reply


Debra Clark (Debra Clark)
#146 ranked lender in California - 42 contributions

This obviously also depends on how long you intend to stay at the house. If you are looking to stay in the house more than 5 years, I would certainly take loan#2 since u have the same interest rate but u have put less money down and not tied up your cash in down payment

Aug 4th 2009
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