Is Money From a Cash Out Refinance Taxable?
Posted by @TopMortgageRate
What Is a Cash-Out Refinance?
A cash-out refinance is a refinancing of an existing mortgage loan, where the new mortgage loan is for a larger amount than the existing mortgage loan, and you (the borrower) get the difference between the two loans in cash. Basically, homeowners do cash-out refinances so they can turn some of the equity they’ve built up in their home into cash.
Here’s an example to illustrate: Let’s say you own a $300,000 house and still owe $200,000 on the current mortgage. (This means you’ve built up $100,000 in equity – a fancy word for ownership).
Now let’s say you want some extra cash to the tune of $30,000. You could do a cash-out refinance to get this money. If you did this, you’d get a new loan worth a total of $230,000 (the $200,000 you still owe on your home, plus the $30,000 you’re going to take out in cash).
Uses of the Cash
Typically, you can use the cash you get from a cash-out refinance on pretty much anything you want, be it paying down your credit card debt or taking a vacation. In practice, however, some uses of the money are smarter than others.
If you have high interest debt such as credit cards, it may make sense to use a cash-out refinance to pay off this debt (do the math to make sure the all-in costs, including the closing costs for the cash-out refi, work out), because the interest you pay for your credit card likely far exceeds the interest on your new mortgage loan.
In doing this, you get other perks, too: You may boost your credit score by paying down your maxed-out credit cards, and you can get a tax benefit from moving the credit card debt to mortgage debt because you can deduct mortgage interest on your taxes.
It may also make sense to use this money to do home improvements, which can boost your home’s value down the road. Just remember, no matter what you use the cash for, it’s risky: You could lose your house if you don’t repay the new mortgage loan amount.
Restrictions of a Cash-Out
RefinanceMany lenders won’t give borrowers in certain kinds of situations the option to do a cash-out refinance. Some common limits include: You may have to have a minimum credit score (often this is higher than with a regular refinance), have owned your home for at least a year and have a loan-to-value ratio (that’s the mortgage amount divided by the appraised value of the property) that’s a maximum of around 85 percent.
Costs of a Cash-Out Refinance
A cash-out refinance is similar to a regular refinancing of your mortgage in that you’re going to have to pay closing costs. These can add up to hundreds or even thousands of dollars. Plus, you’re going to have to pay interest on the cash that you get out (in addition, of course, to the mortgage amount), which can add up to thousands of dollars over the life of the loan.
See full article on Zillow.com