What is a Cash Out Refinance?
One type of refinance which is very popular for today’s mortgage holders is the “cash out” refinance, in which the borrower taps into the equity of the home to obtain cash. While not all lenders offer this type of refinance option, it is very useful for some borrowers who need access to cash for educational or medical needs, or wish to pay off high-interest bills.
Basically, a cash-out refinance allows the borrower to refinance more than the current principal balance of the mortgage and take the remainder of the loan in cash. There are variations on the way this type of loan is administered, but generally the money received is designated for a certain purpose.
What can I use the cash out for?
Some people utilize the cash-out refinance mortgage to pay off high-interest bills. By using the equity built in the home to pay off credit cards and other debts, the borrower can significantly lower his or her overall interest rate and keep monthly payments low.
Is it a good idea to cash out some of my home equity?
While this seems a good plan in theory, there are dangerous pitfalls to this approach. Many people borrow money on their mortgage to pay off high-interest credit cards, only to run the balances up on those same cards again. This causes them to have the high-interest debt along with a higher balance on their mortgage, which can lead to financial ruin. If you opt for a cash-out mortgage to pay off credit cards or other debts, the safest way to ensure that you do not run up your other debts again is to close those accounts.
Another purpose of the cash-out mortgage refinance is to provide cash for educational or medical expenses. These types of expenses can easily mount into thousands of dollars, so sometimes tapping the equity in the home is the easiest way to pay for them. However, there are other options for financing education, such as low-interest student loans, and many medical expenses can be negotiated or even written off if the income level of the patient is sufficiently low. Be sure to explore other options before you consider a cash-out refinance to pay for expensive educational or medical bills.
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If you obtained a cash out refinance what happens when it ends up in foreclosure?
Example: You refinance with $200,000 cash out & house appraises at $650,000. The loan is $520,000. Value of property drops to $450K so you can't refi; the cash has been spent & now it is going into foreclosure. What will bank do?
They go after your other assets, accounts, property and wages until you have repaid all of the money they gave you, interest on it and the legal expense of getting their funds returned to them.
Eventually you will pay them back.
It'll foreclose. It now owns the property, currently worth about $450,000.
It'll determine the value of the property through a BPO (broker's price opinion). It will then list the home with a Realtor, probably for a price around the BPO. Assuming your estimate is correct, the BPO would be around $450,000. Then, on a regular schedule, it'll drop the price of the home. For example, perhaps every 45 days it'll drop the price by $10,000. At some point, someone will come along and buy it.
As for the owner of the home, the foreclosure transfers ownership of the home. And it's a black mark on the owner's credit. Once the foreclosure occurs, the owner no longer has a right to live there, and must move.
From your point of view, you sold the house back to the bank for $450K and have cancelled debt income of $70K. You calculate your gain/loss on the property using the $450K number. You can have taxable income from both.
Typically, how long must you own a home to do a cash-out refinance?
I am planning on buying a home that needs a lot of work. I also have some credit card debt I would like to get rid of. I have the 10% to put down and have been pre-approved for a mortgage.
If I buy this home, can I then turn around and do a cash-out refinance for, lets say, 80%-90% of appraisal value? Would I have to wait a certain period before a bank would do this?
Once you get the house back into good shape, and the value is back above where you financed it in the first place you can get it reappraised and start over on your new loan for the unit. Or get a second mortgage.. Time factor is not a big deal,, the equity in home is the deciding factor.
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Can you still refinance with cash out if your home has been off the market more then 3 months. ?
I have a balloon payment coming up in Sept 09 and would like to refinance with cash out. The bank told me cash out at 80% of LTV and at least 3 months off the market. Now they are changing there tune. They said that since the house has not been off the market for more then 6 months they have to drop my LTV to 70% are they legally aloud to change there tune after I have payed my lock in rate fees and signed paper work.
If you read your agreement, you will undoubtedly see that they have included language along the lines of "the bank has the right to change these (the refinance rules) conditions from time to time with proper notice."
In effect, what you signed gave you the right to refinance under certain conditions, but those conditions can change somewhat.
If you applied with a big bank you are stuck with their guide lines and they can change them at anytime. What usually happens when you have your loan locked and the guide lines change is you are given a specific time frame that you must close and fund the loan under the old guide lines but that is up to the individual lenders.
Can I put all my Cash-out refinance's interests on Schedule E as mortgage interests?
I'm a 'passive' investor and own rental property A & B.
If I do a cash-out refinance on rental property A, can I write all my interests as mortgage interests to offset my rental income from propety A? Is there a limit? And if property A ends up as a loss, can I use it offset the passive income from property B? Is there a limit?
there are multiple limits of various kinds.
1st. if you cash out more from property A than your remaining equity in property A [original down payment or basis less accumulated depreciation plus capitalized items during your holding period less salvage received or loss deducted], the excess is taxable income in the year received.
Depending on depreciation recapture provisions, some or all of this may be ordinary income.
2nd. yes, all the interest paid on debts on Property A would go on Schedule E.
3rd. yes, the net loss on Property A [including depreciation] would offset the net income on Property B.
4th yes, there is a limit on losses from passive activites -- and a separate schedule on which to figure it out [see forms at irs.gov -- Limitation on Passive Activity Losses -- I think that's what it is called].
5th. points, costs, and fees paid to refi the debt on Property A probably have to be capitalized and amortized over the life of the new loan. [The loan statements will include them in the capital paid figure]. The similar remaining balance of points, fees, and costs that you are currently amortizing for the current loan on Property A are probably deductible as financing expense.
Atm, that's all I can think of...
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And that's all if you can find a cash-out refi of an investor property in the present loan market. My offhand guess is that you'll not be allowed to lower the equity to appraised value ratio beyond 20% at least -- possibly more depending on market. AND, I'll bet the lender will want an unconditional personal guarantee of the loan as well.
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Are you sure you don't want to hire an accountant to figure out this stuff??
How Soon Can I Take Out a Home Equity Loan or Refinance After a Cash Purchase of a Foreclosure?
The house is only 10k. So if I pay 10k cash, how fast can I do a home equity loan for that 10k? I need to make repairs as it is a foreclosure in poor condition. Can I do a refinance loan and get more than I even paid for it if it appraises higher than 10k, which it will? Thanks for any help
It all depends on the difference in the value of the place and the amount owed on the loan - that is what's considered your equity. Many banks will only loan up to about 80% of the equity, but a few go higher. For example, lets say you owe $50,000, but the place is worth $60,000, then you have $10,000 in equity. Take 80% of that and you have about $8,000 you could loan against.
I found a great article about it on
www.payoffmyloansnow.com
Will I be taxed Capital Gains if I receive cash-out from the refinance of my primary residence?
My primary residence is in Fl, and my wife and I have lived in it for over 2 years. I plan to refinance later this year and cash-out about 100k in order to remodel my home. Will I be responsible for capital gains on the cash-out?
No. Equity removed from a home in a cashout transaction is never taxed.
However, if when you go to sell the home, if you are then subject to capital gains, hopefully you haven't already spent it. But that's unlikely to be an issue, as the first $500,000 in gains is tax-free for a married couple who have lived in the home as their primary residence for at least 2 of the prior 5 years.
And considering that most of that money will actually go to capital improvements to the home, you'll be increasing the cost basis of the home, limiting the actual gain when you do sell. Just be sure to keep your records of the improvements until you sell! I don't know what counts as a capital improvement and what doesn't, but when the time comes, a CPA will be able to answer those questions for you.
You cannot be taxed on a loan. Until you actually sell the house, the value of the home is in question because the market will determine the actual value at sale time. Because of this fact, you cannot have capital gains as long as you own the property.
A refinance does not create a capital gain. Period.
The cash you collect at close merely is a "return of capital" or a return of cash previously invested in the mortgage, and is not includible as income.
Make sure you keep the closing statement on the refinance - and give it to your tax preparer next year. There will be several items to deduct on your next tax return.
If I refinance my home to cash out equity and end up foreclosing in the future, what can happen to me?
I like many others am in financial trouble and am having problems paying my mortgage.
I'm thinking about refinancing my home (for no more than it's current market value) and taking my equity so I can pay off my car and a credit card.
If I do that, and still end up facing foreclosure in the future - what can happen to me besides having my credit ruined?
I live in Arizona - the law here states that - "A lender may not bring a deficiency suit against a person who lost a property that is 2.5 acres or less at a foreclosure provided the property is a single one-family or a single two-family dwelling."
I fall into that catagory. Basicly, I'm wondering about future pit-falls if the worst case scenerio happens and I do end up foreclosing after I do a cash-out refi.
That is not the law here in Texas but it sounds like you will be OK there except....if you do this and somehow they can tell you planned it all along...I bet that falls into the category of defrauding a bank (bank fraud).
If you innocently have hard times though, your credit is ruined, but it doesn't sound like you can have a deficiency filed against you.
The federal government is discussing passing a law that might protect you against the "phantom income" problem. "Phantom income" is when a mortgage company turns any shortfall into the IRS and you owe taxes on that amount of the mortgage you didn't pay back.
There is often a clause in mortgage applications and the promissory notes itself that require you to notify the lender of any condition that may tend to make repayment of the loan more difficult in the future, or words to that effect. So, the fact that you say you "are in financial trouble" and "having problems paying your mortgage" but you think you will be approved for the refinance loan, make me wonder if you are thinking of not disclosing material information to the lender.
Don't do that, instead, contact the lender and try to work out a better deal. You don't want fraud in your background, that will hamper you for a long long time.
Basically the only thing that will happen to you is when the bank sells your home for less than is owed, you will get a 1099-S from the lender for the difference in what was owed and what the bank could get for the property.
If you can prove financial hardship, the I.R.S. will forgive the taxes owed.
Hope this helps.
Terry S.
Http://www.Welcome2Arizona.com
P.S. Be grateful you live in Arizona! Many states DO NOT allow the homeowner to walk away from their property without paying the bank back what they lost on the foreclosure sale.
If you are having difficulty making the current loan ,
There is a snow balls chance in helll of them letting you have a Larger Loan .
So all of this is probably just fantasy on your part .
Maybe time to get a 2nd job for awhile to get your $$$$$ issues on track ?
>
I seriously doubt that law exists in Arizona because if it did, banks would refuse to underwrite in a state that basically takes away all legal recourse.
I have a credit score of about 560 and I want to refinance my home with a cash-out. I make over $4000 a month?
I just paid off all my bills in collections (THEY WERE ONLY MEDICAL). I just got promoted. And I really want to refinance my home and get a cash-out to pay off some debts for myself and my husband. My credit score dropped to 560 due to some unexpected hardships in the last 6 months. Does anyone know of a good bank or place to start that will work with my credit score? I am in WA State.
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Do I need to report the equity "cash out" from mortgage refinance as income?
I do my own taxes every year, but this year I have a question. I refinanced my mortgage in the spring. Had a significant amount of equity and decided to "cash out" some of my equity to help pay off some outstanding debts (car, student loan, credit card balance) and kept some to keep in saving (so it's accessible, if needed). I know the government tries to take a piece of everything, but this is MY money. It's not "wages" -- does that make a difference?
No.
You report equity on your home when you sell it. Then, you subtract your total costs from your home from the selling price to figure your profit on the sale. If you are single and have owned your home for two years or more, the first $250,000 is not taxable income. If you are married, the first $500,000 of profit is not. Any amount above and beyond that amount or if you have not lived in your home as your primary residence for more than two years, all profit is deductible.
I have 65,000 left on my 30yr mortgage,but have no savings i can get back 25,000 in a refinance take cash out?
i would have a 90,000 mortgage with the same payment as now.im going to sell in a couple years anyways.if I refinance I get back 25,000 in cash.My house was appraised for 120,000.good idea not not?My payment would be the same.