The idea is simple I just don’t know if I am missing anything. The interest on my primary home is not tax deductible versus the interest in rentals being tax deductible. I am thinking about cash out-refinancing my rentals and using cash from those to pay off my primary home.
Primary home- Owe 470,000 rate 3.25%
#1 rental- Owe 135,000 rate 4.25% ( home valued at 410,000)
#2 rental Owe 175,000 rate 4.125% ( home valued at 245,000)
My rentals are on conventional primary loans so I understand I refinancing my turn them into investment loans. Should I take out as much equity as I can and use that to pay off my primary home?
Keep in mind that for those two rentals, on a cash-out refi your new loan can only be as much as 75% LTV. So you can maybe get out around $160k on #1 after closing costs. There's not much you will be able to take out on #2 if any. That's still a substantial amount on #1 that you could definitely make some sort of moves with.
I don't think I would personally use that money to pay down my primary at a 3.25% rate, but I'll be interested to see what others think.
The interest of your new loan is not all tax deductible if you use cash out for your primary. You would still only use interest from Original loan for the write off. If you used for investments you could right off that interest for that new investment.
Errr you want to pay off your lowest rate loan?
@Braxton Warren -- You have fairly attractive rates across the board. I think an investment property portfolio loan, where you cross-collateralize the 1 loan w/ the 2 properties, will get you 75% LTV on both rentals and a rate around 4.5% - 4.75% for a 30 year fixed, with a 5 year prepayment penalty. I'm not too well informed w/ the various tax implications, but if you've confirmed w/ a tax professional that there's an advantage to the debt on rentals v primary, then perhaps it's worth it since investment property loans still carry very low rates. But, unless you have cash from other sources, there's not enough equity in the rentals to pay off your primary. You'll likely net around $165k - $175k from the cash-out refi on the rentals (assuming your pay-off figures are correct and you qualify for 75% LTV on each).
@Braxton Warren I'd much rather have no interest to pay, rather than having the ability to write-off interest. You pay $3 of interest to get $1 back on tax benefit. To pay off multiple properties I’m a big proponent of a very specialized 1st position Heloc that’s tied to a zero balance sweep checking account. My wife and I set one up on our primary while it was our primary (now rental) and it’s been an awesome tool for us. That sweep account allows all of our checking deposits/idle funds to sweep directly towards our outstanding balance, saving us a ton of interest cost. We also retain access to 80% of our equity, so it really maximizes our flexibility. I always recommend anyone who qualifies to check it out, you may be able to pay those all off much quicker than you thought possible.