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Cash out refi pros/cons
Old 08-14-2019, 06:39 PM   #1
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Cash out refi pros/cons

Assuming we could get a great rate...

Any thoughts on refinancing primary residence from 3.75% 23 year left to ~2.75% / ~15 year and pulling out cash to pay off 4.75% 20 year left rental property?

Rough estimates look like we'd save around $40k with term adjusted to match current payments. If kept at 15 year would have larger payment but save around $50k.

Downsides?

If higher payment, could just pay extra now?
having rental paid off, lawsuit liability?
No more home equity available?
Remortgage rental would be worse rate if we needed to down the road?
Pay more tax on rental income but less for personal?
If 15 year higher payment, less money to throw in market
Refi costs
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Old 08-14-2019, 06:43 PM   #2
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You can't refi the rental?
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Old 08-14-2019, 06:48 PM   #3
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I'll definitely check but in the past, rates seemed to be much higher vs. Primary residence.
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Old 08-14-2019, 06:56 PM   #4
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2.75 % on the 15 yr is OK, but what is the APR?

We are priming to switch from a 30 yr @ 4% w/ 23 yrs left to a 15 @ 2.75. APR is ~3.92%. Iím hoping rates drop a bit more.
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Old 08-14-2019, 06:59 PM   #5
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I'll definitely check but in the past, rates seemed to be much higher vs. Primary residence.
My experience exactly, almost 1 percent higher on our rental even with LTV almost 50%.

Only 2 problems I see 1) If for some unforeseen reason you canít make payment that is more than today on primary residence you could loose your home cause you canít rent for extended period; or 2) you canít deduct interest on portion of loan that applies to rental. More in taxes ?
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Old 08-14-2019, 07:00 PM   #6
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A Refi on the rental would be a higher non-owner occupied rate.

How about a HELOC on your personal home, you can still deduct the interest if you use it to pay off the rental. And minimal closing costs.

Most of my rentals are paid off. If you are going to be sued as a LL, the number one reason is you do not return the damage deposit.


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2) you can’t deduct interest on portion of loan that applies to rental. More in taxes ?
You can always deduct rental property interest. No matter where the source is. SALT limits do not apply.
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Old 08-14-2019, 07:06 PM   #7
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You can write off the portion of the interest on your refi that is attributed to the rental. I have done that and am considering doing it again if rates drop again. You need to document the amount borrowed, the amounts of the loans paid off and all the closing costs so the interest and the financing costs can be segregated by property.
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Primary residence interest non-deductable
Old 08-14-2019, 07:10 PM   #8
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Primary residence interest non-deductable

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A Refi on the rental would be a higher non-owner occupied rate.

How about a HELOC on your personal home, you can still deduct the interest if you use it to pay off the rental. And minimal closing costs.

Most of my rentals are paid off. If you are going to be sued as a LL, the number one reason is you do not return the damage deposit.




You can always deduct rental property interest. No matter where the source is. SALT limits do not apply.
Since many here have told me repeatedly money is fungible, how do we deduct the heloc for rental? Do you have to use the HELOC check to pay the Rental mortgage?

Could you consider it a cash out refinance?
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Old 08-14-2019, 07:18 PM   #9
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I did the no closing cost HELOC deal a few years ago to pay off a rental mortgage with a very high interest rate. The mortgage on the principal residence was at a very low rate and it made no sense to refinance with cash out and I had too many loans to qualify to refinance the rental. The lender insisted on paying off the rental mortgage out of escrow. Fine with me - less work for me to do! Paid the HELOC off in about three years IIRC.
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Old 08-14-2019, 07:21 PM   #10
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Do you take the standard deduction?

The interest on the rental is deductible and not subject to any constraints. Interest on personal residence may be useless if you use the standard deduction.
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Old 08-14-2019, 07:30 PM   #11
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I was recently offered a very good rate on a second (not a HELOC) on my house by US Bank. Minimal closing costs and 4.54 APR. You might want to look at some more options.
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Old 08-14-2019, 08:36 PM   #12
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This is an interesting discussion. @senator, If you take a loan out on your primary residence, can you can take the proceeds to pay off a rental property and write off the interest as an expense against your rental income?
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Old 08-14-2019, 08:50 PM   #13
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Oh, great point, we always itemized until this past year I think due to tax changes.
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Do you take the standard deduction?

The interest on the rental is deductible and not subject to any constraints. Interest on personal residence may be useless if you use the standard deduction.
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Old 08-14-2019, 08:51 PM   #14
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This is an interesting discussion. @senator, If you take a loan out on your primary residence, can you can take the proceeds to pay off a rental property and write off the interest as an expense against your rental income?
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Since many here have told me repeatedly money is fungible, how do we deduct the heloc for rental? Do you have to use the HELOC check to pay the Rental mortgage?

Could you consider it a cash out refinance?
Take the loan out on your personal residence and pay off the mortgage.

The interest that will be paid is for the Rental. List the interest expense on your schedule E (or 1120(s)), the amount that was paid in interest. The interest is a business expense, the same as it was before you paid off the mortgage. You do not become more profitable by switching business expenses to person expenses.

Then, do NOT deduct it on your personal taxes, even if you get a 1098. It doesn't matter if it is HELOC or a refinance mortgage. The interest is a business expense and reported as such. It doesn't matter what checking account you write for the HELOC payment.
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Old 08-14-2019, 08:53 PM   #15
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Take the loan out on your personal residence and pay off the mortgage.

The interest that will be paid is for the Rental. List the interest expense on your schedule E (or 1120(s)), the amount that was paid in interest. The interest is a business expense, the same as it was before you paid off the mortgage. You do not become more profitable by switching business expenses to person expenses.

Then, do NOT deduct it on your personal taxes, even if you get a 1098. It doesn't matter if it is HELOC or a refinance mortgage. The interest is a business expense and reported as such. It doesn't matter what checking account you write for the HELOC payment.
Great gouge. Thanks so much.
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Old 08-15-2019, 05:19 AM   #16
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Take the loan out on your personal residence and pay off the mortgage.

The interest that will be paid is for the Rental. List the interest expense on your schedule E (or 1120(s)), the amount that was paid in interest. The interest is a business expense, the same as it was before you paid off the mortgage. You do not become more profitable by switching business expenses to person expenses.

Then, do NOT deduct it on your personal taxes, even if you get a 1098. It doesn't matter if it is HELOC or a refinance mortgage. The interest is a business expense and reported as such. It doesn't matter what checking account you write for the HELOC payment.
+10 We refinanced our home in 2010, and paid off rental #3, the rental had a 7.875% rate, new rate 4.375%. We separated the interest as Senator described above on our tax return. Rental #1 had a floater at 2.75%.

Fast forward last week, closed on refinance at 3.375%. Paidoff Rental #1, now at 5.25%, Rental #3 at 4.25%, absorbing rental #2 in the process. Saved over $975/moth in mortgage payments, however taxable income will go up since only interest is deductible. However, since most of new mortgage is for rentals, we will get a bigger bang with standard deduction.
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Old 08-15-2019, 06:56 AM   #17
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FWIW: an estate atty recommended "equity stripping" rental properties in order to reduce equity available in a lawsuit from renter. The rentals were to be put into individual LLCs and then equity stripped via loans, leaving little equity in the LLC.
YMMV. I'm not advocating it... just passing it along.
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Old 08-15-2019, 07:20 AM   #18
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FWIW: an estate atty recommended "equity stripping" rental properties in order to reduce equity available in a lawsuit from renter. The rentals were to be put into individual LLCs and then equity stripped via loans, leaving little equity in the LLC.
YMMV. I'm not advocating it... just passing it along.
Decent umbrella insurance takes care of this concern. Yes, you can do all these LLC maneuvers but LLCís can and do get pierced in lawsuits. Also, make sure all that equity stripping isnít costing you a ton of money due to higher interest rates or due to not being able to re-invest that equity in a profitable way.
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Old 08-15-2019, 07:27 AM   #19
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You can write off the portion of the interest on your refi that is attributed to the rental. I have done that and am considering doing it again if rates drop again. You need to document the amount borrowed, the amounts of the loans paid off and all the closing costs so the interest and the financing costs can be segregated by property.
I started to write that I thought this is not correct and looked it up. But I was wrong.

What I did find is if you do this you need to be able to trace and document the use of funds within 30 days of the heloc or refi. If you do it this way it is deductible on schedule e.

This opens up a way for personal home interest to be deductible for those of us who don’t itemize and have rental properties.
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Old 08-15-2019, 07:58 AM   #20
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2.75 % on the 15 yr is OK, but what is the APR?

We are priming to switch from a 30 yr @ 4% w/ 23 yrs left to a 15 @ 2.75. APR is ~3.92%. Iím hoping rates drop a bit more.
We were 5 years into our 30yr @4 when I refi'd 3 weeks ago to APR 3.04 2.75%

They were pushing the cash out option hard for me...so sure if you have the equity...the new lender appraised my property 31% higher then the county's assessed value. A time of the signs. CHEAP MONEY, grab it while you can.
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