Cash out refi or two separate loans? (refi + purchase) (loan, heloc, 30 year fixed)

[FALLSCHURCHER]

I'm asking on behalf of a friend planning to move out of his condo and buy a townhouse in NoVa.

Current primary residence is a condo.
Current value of condo: $340,000
SunTrust Bank loan remaining: $182,000
- $170,000 (6.875% 30 year fixed, 7 years into the loan)
- $12,000 (HELOC currently at 3.5%)
SunTrust loan

Under contract to purchase a townhouse and move there.
Purchase price: $210,000
Cash downpayment from savings account: $100,000

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So option one is to:
SunTrust says they can do a cash out refi from the condo and pull out $100,000 from the condo to purchase the townhouse. SunTrust indicated they will most likely give 4.5% with 0.5 points.
The upside seems to be just being one loan do deal with, but the downside is since my friend is planning to move out of the condo into a TH, he won't be able to deduct mortgage interest payments on the condo.

Option two is to:
Local bank says:
Do a refi on the condo of the $182,000 remaining balance as the principal residence (you get slightly better rates).
(6.875%-->4.5%), then do a $110,000 loan for the townhouse (4.75%-due to smaller balance, this was the best rate offered).

The upside seems to be that you would be able to deduct the interest portion as the TH would be the primary residence. There are many banks offering rates as low as 4.25% on the 30 year fixed. Smaller or internet banks give better rates than at SunTrust.


Anything I'm missing? Any downsides to doing the cash out refi? Or does it just come down to comparing lender costs and rates on the good faith estimates?

Thanks!!

[chet everett]

Why is one loan an upside?

Low rate , better clarity makes the second option a no brainer...