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Level 15

Refinance balance higher than original loan

Your debt is the principle part of your loan. It can be divided into acquisition debt and equity debt. In your case, it is mostly acquisition debt with a small amount of equity debt.

 

When you make a payment, part of it is interest, and part of it may go to escrow, and part of it will pay down your debt (balance).  In the above calculations, the IRS allows you to assume that you are paying off your equity debt first.  Do you actually know how much debt you have at any given month, you have to look at the principal balance on your mortgage statement.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 2

Refinance balance higher than original loan

Just confirming as I have a similar situation of a cash out refi back in 2016 that i used to purchase another home.  I take the loan balance before the cash out and divide by the new loan amount.  so if original refi before cash out was 210,000 and after was 245,000.  my portion of Mortgage interest to deduct  this year is 210,000/245,000 .. 85.8%? This is the amount I enter in TT if I put in myself?  Also once my loan is valued back at 210,000 i no longer do this?  I don't know if I did correctly for 2018.  Should i amend?

Thanks in advance!

Level 15

Refinance balance higher than original loan

that is correct.....

Level 2

Refinance balance higher than original loan

Great!  Thank you.  The interest deduction I calculated using the percentage in the scenario above is a little lower than if i let TT calculate since it was from 2016.  For example:

If I don't calculate myself and let TT help me, do I enter the amount of loan prior to cash out on the first line ? 

For example  In the section "tell us about how you have used this loan"..

 "Since you have first took out this loan, how much has been used to buy, improve or build this home its secured by"  (210,000 as in original example)  Then it It also shows the mortgage balance at the end of this year.  

Since I did the cashout in 2016,  it has improved because i have paid 3 years toward this Cashout.  Is that correct?  

Therefore, which scenario should i use?

Level 2

Refinance balance higher than original loan

 

If I don't calculate cash out refi percentage myself and let TT help me, do I enter the amount of loan prior to cash out on the first line ? 

For example  In the section "tell us about how you have used this loan"..

 "Since you have first took out this loan, how much has been used to buy, improve or build this home its secured by"  (loan value before cash out refi)  Then it It also shows the mortgage balance at the end of this year.  

Since I did a cashout in 2016, this number is better if I let TT calculate.  Is it because i have paid 3 years toward this Cashout.  Is that correct?  

Therefore, which scenario should i use?

Level 15

Refinance balance higher than original loan

here is how it should work:

 

let's say you bought a home for $200,000 with a $150,000 mortgage.

 

Then in 2016, when the remaining mortgage balance was $125,000, you refinanced the mortgage to $175,000. (so cash out!). 

 

Then in 2019, when the mortgage balance was $165,000, you refinanced the mortgage to $200,000. So cash out again! 

 

for 2019, the mortgage balance that was used to purchase / improve the home is $125,000 (I assume none of the cash out dollars was used to improve the home), meaning the interest related to $75,000 is not deductible.

 

As time moves forward and you pay down the mortgage, it;s the $75,000 that gets paid down first, so the percentage of interest that is deductible keeps going up.

 

p.s. if you are taking the standard deduction, none of this matters!!!! 

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