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The year is almost at an end and we’ve seen some mortgage rate drops recently. It may be an ideal time to refinance your mortgage loan. Better yet, you might want to consider a cash-out refinance loan. Cash-out refinancing can allow you to refinance your mortgage at a lower interest rate, while also cashing out some of your home equity to use for other purposes.
If you are ready to refinance now, you may be able to take advantage of some year-end tax benefits before 2022 comes to a close. At the very least, there are always certain tax advantages associated with cash-out refinancing. However, it will depend on how you use the cash you are borrowing.
Here are some cash-out refinancing tax benefits worth knowing as an Atlanta homeowner:
Mortgage Interest Tax Deduction
If you are keeping up with your monthly mortgage payments, you should already be taking advantage of your mortgage interest tax deductions. You will get Form 1098 from your mortgage lender if you make at least $600 of mortgage interest payments in a tax year. Interest payments for the original mortgage plus those associated with a mortgage refinance will count toward your tax deduction.
The maximum deduction amount is $750,000 for interest payments made on primary and secondary homes. If you are married filing separately, the limit for each individual taxpayer is $375,000.
Mortgage points allow you to prepay during the loan origination (including a refinance loan) and buy down the interest rate. They are also known as “discount points.” In most cases, you would deduct the points over the life of your mortgage loan. However, there are instances where you may be able to deduct the entire points prepayment during the same year of your mortgage refinance. This can be done if you meet the following criteria:
• Refinancing your primary residence mortgage loan
• Cost of points cannot exceed general cost for your area
• You are substantially improving your primary home
• Points cannot cover miscellaneous fees or property taxes
Your mortgage insurance premiums (MIP or PMI) are also tax-deductible. This is true if you are currently paying mortgage insurance as part of your original loan and/or you are still required to make mortgage interest payments as part of a cash-out refinance.
Cash-Out Refinancing Tax Deductions
A cash-out refinance loan allows you to tap into your home equity and borrow cash. Your original loan principal balance and the amount you cash out will be combined together as one new mortgage loan at your new qualified mortgage rate.
In order to qualify for a tax deduction on a cash-out mortgage refinance, the money must be applied toward capital home improvements on the residence. This is why cash-out refinancing is a great solution for homeowners who are looking to make major home improvements and who qualify for a lower mortgage rate than they are currently paying. You can use your home equity to cover your home improvement expenses while also being able to claim a tax deduction on qualified improvements.
There are no limitations to how you can use the cash you take out during a cash-out refinance. You can use it to pay down other high-interest debts, pay off expensive medical bills or college costs, or go on a nice vacation. However, you will only qualify for tax deductions if the funds are used for capital home improvements.
Mortgage interest on standard home equity loans can also be deducted if the money is used for home improvements. In most cases, though, a cash-out refinance will offer a better solution (and better rates) than a separate home equity loan or home equity line of credit (HELOC).
Cash-Out Refinancing for Atlanta Homeowners
If you are in the Atlanta area and want to learn more about cash-out refinancing, contact Moreira Team | MortgageRight today. Don’t wait if you are hoping to refinance before the end of 2022. You may be able to take advantage of some of these tax savings this year if you act quickly!