Cash Out Archives – Mike Pfefferman

Taxes And A Cash-Out Refinance: What To Know If you decide to go through the refinancing process, there are several options available. One of the most popular options is a cash-out refinance. Essentially, you capitalize on the difference between current interest rates and the interest rate on your home loan to keep your payments the same while also drawing equity out of your home in the form of cash. You can use this money to fund your retirement, complete home repairs, or do a renovation project. Even though you can do just about anything you want with this cash, what do you need to know about a cash-out refinance and taxes?

You Do Not Have To Pay Taxes On Your Cash-Out Refinance

You don’t have to pay taxes on the cash stemming from a cash-out refinance. The IRS generally looks at this money as a loan that you will be expected to pay back. Therefore, you don’t have to report it on your taxes. On the other hand, there are other implications you need to know.

The Interest On Your Mortgage Is Tax-Deductible

One of the biggest tax deductions you might claim is the interest on your mortgage. If you want to claim your mortgage interest as a tax deduction, you will need to itemize your deductions on Schedule A. Furthermore, there is a limit to the amount of mortgage interest you can claim on your tax forms. If you have questions about how to handle your mortgage interest on your taxes, you should talk to a tax professional or an attorney who can help you.

Consider Setting Up A Home Office

You might even want to use the money from your cash-out refinance to build a home office. If you are self-employed and working from home, you might be able to deduct the expenses related to your home office. Again, you need to be familiar with the requirements related to your home office if you want to claim this deduction. A tax professional can help you.

Be Aware Of The Implications Of Refinancing And Taxes

These are a few of the most important points you should keep in mind regarding taxes and the refinancing process. Reach out to a tax professional with any questions.

US homeowners now have over 5 trillion dollars in home equity which is a very large amount of money! So this year may be the year for a lot of cash out refinances and other home equity mortgage products. Most often, when you are purchasing a home, you are buying at or below the appraised value and you are making a down payment.

The good news is this means you have “instant equity” in your home. And over time you build more equity as you make your monthly mortgage payments as well as any potential home price appreciation.

This build up of equity gets some homeowners thinking about taking cash-out from your home to pay off credit card bills, purchase a car or pay for college expenses. However, it is important understand, there are rules as to what can and can’t be done.

Cash out refinance, equity loan or second mortgage

There are three basic ways to access the equity in your home which are common these include:

Cash out refinance – you refinance your current mortgage and you request cash-out for the equity. For example, if your home is worth $200,000 and you have a current mortgage of $100,000 you may be able to access an additional $60,000 to $70,000 in cash depending on your lenders requirements
Home equity loan – a home equity loan is typically a line of credit that you take out with your local bank. These loans are typically what are known as “revolving” where you can access the funds over and over again as you make payments. Home equity loan interest payments are not tax deductible after the recent tax reform plan
Second mortgage – in order to qualify for a second mortgage on your home, the lender would require you to meet specific credit requirements as well as certain debt-to-income ratios.

In most cases, lenders will require borrowers to have had their mortgage at least one year before they are allowed the option of any type of cash-out refinance. However, Ginnie Mae (GNMA), the investor for FHA and VA home loans allow cash out transactions after 6 monthly payments and a minimum of 210 days in the home.

While you may already have a substantial amount of equity in your home, lenders are taking an additional risk if you are allowed to “tap into” that equity. Before you make the decision to access the equity, talk to your trusted mortgage professional regarding possible restrictions.