Loan payoff then remortgage?

Question

I am looking Into refinancing an investment property and taking cash out. However cash out terms seem much worse (lower LTVs higher rates) than new purchase terms. I have the capital to payoff the whole mortgage. If I did this then applied for a “new mortgage” on the same property would I get better terms as if it were a new buy or would this still be considered “cash out”? Any thoughts?

Chris Champlain · Answer

Thanks Joe, so if I paid it off then put a new mortgage on it, it would still be considered a cash out refinance, snd fall under those worse terms. Makes sense, just wanted to make sure I hadn’t stumbled on a loophole.

Joe Splitrock · Answer

If you refinance, you can keep claiming a portion of interest against the property equal to the interest on the payoff portion. If you refinance a paid off property, none of the interest is deductible against the property, because 100% of the money is cash out. IRS rules state deductibility follows use. You may still be able to deduct the interest, but it would be against other properties you are acquiring. Any portion of the cash-out you use for personal use, the interest portion is not deductible.

As far as whether it is paid off or not when refinanced, should make no difference on LTV or appraisal amount.