Under these coundition, can I deduct the interest?
- I have no mortgage on my primary home
- I would like to do a cash out refi on primary home and use all funds to purchase a 2nd home
- 2nd home would be for vacation. Not rented for more than 14 days a year
i’m getting conflicting answer and want to make sure I choose the right option. Thanks!
Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. In your case you already own the home.
Why not purchase the second home with its own mortgage in which case you would satisfy the requirements for deducting the interest payments?
Thanks for the response!
I was trying to avoid a mortgage on the 2nd home due to higher interest rate and closing costs.
I’ll have to do the math to see if the higher costs are offset by the interest deduction.
You can deduct interest on your main home and one second home, BUT a deductible mortgage must be secured by the property. A mortgage secured by house #1 would only count as a mortgage on house #1, no matter what you used it for, and the cash out would be considered non-deductible equity interest rather than qualified interest for home #2.
I would be very surprised if you could do a cash out refinance of house #1 for a lower interest rate than a primary mortgage on house #2, in any market. They would normally be the same rate, if they are Fannie/Freddie conforming loans.
Note that your effective interest rate on a deductible loan is 20% less than face value, if you itemize your deductions. In other words, 5% with the itemized deduction is equal to 4% without the itemized deduction.
If you don't have the full 20% down for house #2 to get the best interest rate, you might get an 80% mortgage on house #2 and a cash out equity line of credit on house #1 to make up the difference, that way most of your debt would be qualified for the deduction.
This market also might be a good time for an adjustable rate mortgage, if you think inflation and interest rates will settle down again in a couple of years.