It doesn’t make any sense to borrow money at 4% to prepay a loan at 3.5%.
Here are some example numbers:
Current loan: $146,000, 3.5%, 30 yr, $655.61/mo P&I. Prepay $10,000 = $136,000, 3.5%, 655.61/mo for 24 months = $129,573 balance at the end of two years.
$10,000 loan at 4% = $434.25/mo for 24 months.
If you prepay your current loan by paying $655.61 payment + what it would cost to borrow $10,000 ($434.25) for a total of $1,089.86/mo on $146,000 at 3.5% leaves a balance of $129,517 at the end of two years.
So if you borrow $10,000 for 24 months at 4% and pay $434.25/mo and put the $10,000 towards your mortgage, your balance on the mortgage at the end of two years is $129,573. If you pay $1,089.86/mo ($655.61 + $434.25) for those two years the balance is $129,515.
So all that effort to lose $73.
Great analysis, Harlan. In addition, mortgage interest on primary residences is tax deductable, and the interest you pay on the new 10K loan (presumably not tied to the property) is not tax deductible. Certainly the way to go here is to just use any extra funds to pay down the mortgage directly, assuming you have adequate savings and no other higher interest debt to contend with.