topic Re: Refinance balance higher than original loan in Home loans

Refinance balance higher than original loan

CCap — Fri, 07 Feb 2020 17:49:08 GMT

I refinanced this year. It was not a “cash out” loan. However, when I did the refi, the lender rolled the amount for the impound account into the new mortgage, so the balance ended up about $9,000 higher than the previous mortgage balance.
does this count as “taking cash out” when I’m deducting my interest?

Also, if it does indeed count as “taking cash out,” I am experiencing some ambiguity in TT as to what counts as using the so called cash I received on the home - is spending it on my taxes enough? On mortgage payments? Or does it have to be on capital improvements?

Thank you community!!

Re: Refinance balance

CCap — Fri, 07 Feb 2020 17:48:17 GMT

In total, the only “cash” I received from the lender was about a $200 check. The rest went into my impound account / prepaid interest on the payoff.

Re: Refinance balance

NCperson — Sun, 09 Feb 2020 03:19:59 GMT

1) what was the old loan balance on the closing statement?

2) what was the new loan balance on the closing statement

if 2) was higher than 1), it was 'cash out'. it's that simple. doesn't matter that some of the money was used to adjust the escrow or pay closing costs.

you'll get credit for the pre-paid interest on the 1098 form.

also, while 100% of the interest is not tax deductible as you state 2) is $9,000 than 1), as you are paying down some principle each month, it won't be too long until the new balance is back to where the old balance was and at that point, the interest is 100% tax deductible.

Re: Refinance balance

CCap — Sun, 09 Feb 2020 04:04:18 GMT

Got it, thanks!

I see that if I used the proceeds towards the home it’s secured by (either to buy or to improve) it’s still deductible. What counts as “using” the funds towards the home? Do mortgage payments count? And would that include both principle and interest? How about property tax payments?
thank you for your help!

Re: Refinance balance

NCperson — Sun, 09 Feb 2020 16:02:41 GMT

it doesn't work like that - 'using the funds' has nothing to do with the mortgage.

let's say you buy a home for $300,000 and take out a $200,000 mortgage to do so. That $200,000 is considered 'acquisition debt'

then later, when the balance has amortized to $175,000, you do a cash out refinance and now the balance is $225,000. (or simply take out a HELOC for $50,000 - it's the same end result). The interest related to the $50,000 of cash out (or HELOC) is not deductible unless you use the money to build or substantially improve your home. So an home addition, a new roof, replacement of all the windows, etc. would qualify. Paying taxes (or buying a car or paying for a vacation) isn't building or substantially improving your home

Re: Refinance balance higher than original loan

Opus 17 — Sun, 09 Feb 2020 17:14:39 GMT

Acquisition debt is debt that used to buy, build, or substantially improve your home. This does include closing costs like the application fee, the bank attorney fee, a survey, or other closing costs that are routine and required in your jurisdiction. Borrowing the money to fund your initial escrow deposit is not part of your routine closing costs, because that money is going to be spent on your property tax bills and your homeowners insurance. It is cash out, even though you didn’t receive the cash. (The cash was put into the escrow account to pay your future bills.). And frankly, you probably got a refund of the remaining escrow balance from your old lender didn’t you.

So the tax deductible interest on your acquisition debt is the part of your loan balance that was the remaining acquisition balance from the previous lender plus your regular closing cost but not including your escrow funding.

Re: Refinance balance higher than original loan

CCap — Sun, 09 Feb 2020 16:33:53 GMT

Perfect thank you!

Re: Refinance balance higher than original loan

CCap — Sun, 09 Feb 2020 17:38:59 GMT

Follow up: refinanced loan has a balance of $9000 (593k) more than ending balance on original loan (584k). Since refinancing, I’ve paid a total of about 4k in interest on the new mortgage.
when I plug the numbers in, Turbo Tax is taking that entire 4k off of my itemized deductions (from 31k to 27k). Is that correct? Shouldn’t the deduction only be modified for the fraction of those interest payments that went toward the 9k I got back?

thanks again!

Re: Refinance balance higher than original loan

Opus 17 — Sun, 09 Feb 2020 17:56:09 GMT

I can't tell you how this is supposed to work in Turbotax because I haven't tested the interview. Someone else might be able to help. This is what's supposed to happen if you were doing it manually.

First, all your interest on the earlier loan is deductible, assuming it was all acquisition debt.

Then, on the refinanced loan, let's assume the entire $584K original balance was acquisition debt, and you had $4000 in closing costs and $5000 applied to your escrow account. (Your acquisition debt is $588K and your equity debt is $5K.) In that case, your starting loan balance is 99.15% acquisition debt so your interest is 99.15% deductible (588/593). Then you look at your loan balance at the end of the year. If it is below $588K, then your loan is 100% deductible at the end of the year. Average first month and last month, ((99.15+100)/2) and your interest should be 99.58% deductible for this year.

I believe you can also calculate each months' deductible percentage separately, but the IRS provides the first/last average method as simpler. There's also a worksheet here along with the rules https://www.irs.gov/pub/irs-pdf/p936.pdf

(And if the earlier 584K loan was also a refinance and included some equity debt, you will have to go back to your original purchase to figure out how much acquisition debt you really have in the loan.)

I can't tell whether you did the worksheet wrong or whether Turbotax is wrong, because I haven't tested that part of the program. Someone else might be able to help. But that's the answer you should be getting.

Re: Refinance balance higher than original loan

CCap — Sun, 09 Feb 2020 17:56:54 GMT

I might have figured this out myself: when Turbo Tax asks “how much has been spent to buy, improve, or build the home it’s secured by” I should be entering the amount of the payoff of the original loan in addition to any home improvements or payments towards the home, correct?

thanks!!

Re: Refinance balance higher than original loan

CCap — Sun, 09 Feb 2020 17:58:12 GMT

THANK YOU OPUS17!!!

Re: Refinance balance higher than original loan

Opus 17 — Sun, 09 Feb 2020 17:58:59 GMT

For the new loan of $593K., the amount you enter to "buy, build or improve" is your acquisition debt. That would be the amount of the original paid off loan (if it was all acquisition debt) plus your closing costs on the new loan but not including the escrow or cash out.

Re: Refinance balance higher than original loan

CCap — Sun, 09 Feb 2020 18:09:44 GMT

Opus, you are a wealth of knowledge and I really appreciate the help.
Last question (i think): I paid a couple payments on the new loan at the end of 2019 - would those payments count as acquisition debt?

Re: Refinance balance higher than original loan

NCperson — Sun, 09 Feb 2020 19:41:48 GMT

those are not 'acquisition debt' - those are payments 🙂

Re: Refinance balance higher than original loan

CCap — Sun, 09 Feb 2020 20:12:33 GMT

Thanks!

Re: Refinance balance higher than original loan

Opus 17 — Sun, 09 Feb 2020 20:19:16 GMT

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.

Re: Refinance balance higher than original loan

ld1995 — Thu, 20 Feb 2020 03:43:00 GMT

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!

Re: Refinance balance higher than original loan

NCperson — Thu, 20 Feb 2020 10:58:39 GMT

that is correct.....

Re: Refinance balance higher than original loan

ld1995 — Thu, 20 Feb 2020 14:42:57 GMT

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?

Re: Refinance balance higher than original loan

ld1995 — Fri, 21 Feb 2020 11:59:15 GMT

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?