Refinance balance higher than original loan

Forum|Forum|6 years ago
February 6, 2020
2 replies
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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!!

Refinancing

CCapAuthor

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.

NCPERSON1

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.

CCapAuthor

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!

Opus 17

Employee

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.

CCapAuthor

Perfect thank you!

CCapAuthor

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!