Funding question.. cash out refi vs loan

17 Replies

I have a funding question. I have a deal locked up for$250k.. (seller will finance me $50k. So I'm needing funding for $200k. Was looking into cash-out-refi. Accountant says this route won't let me deduct taxes. Does this point be down the road to a conventional mortgage, or is that not a reason to shy away from cash-out-refi? Any other thoughts on which way I should try and get funded would be appreciated. Thank you all in advance.

Roger, just to make sure I'm understanding you correctly- you are attempting to purchase this property correct? You more than likely will not be able to cash out refinance the property unless you are already on title. Most cash out refinances require you to be on title for 6 months. 

To acquire the property, it sounds like you may need to find a lender who will subordinate the seller paid portion of the down paid into second lien position. 

@Joe Villeneuve sorry my mistake. The the question is should I cash out refi from my house versus a conventional loan? I should have been clearer but the accountant said if I do a cash out refi from my house I won't be able to deduct taxes on the rental property. I'm trying to figure out which way makes sense in order for me to get funded on this project. Appreciate your response.

Originally posted by @Roger Princeau :

@Joe Villeneuve sorry my mistake. The the question is should I cash out refi from my house versus a conventional loan? I should have been clearer but the accountant said if I do a cash out refi from my house I won't be able to deduct taxes on the rental property. I'm trying to figure out which way makes sense in order for me to get funded on this project. Appreciate your response.

 I must be missing something.  Why can't you deduct taxes on the rental property?

joe i was told if i take money from my house to purchase the property i wouldn't be able to deduct interest expense from the rental property. I was curious if that loss of deduction was worth going the route of a conventional loan.

Originally posted by @Joe Villeneuve :
Originally posted by @Roger Princeau:

@Joe Villeneuve sorry my mistake. The the question is should I cash out refi from my house versus a conventional loan? I should have been clearer but the accountant said if I do a cash out refi from my house I won't be able to deduct taxes on the rental property. I'm trying to figure out which way makes sense in order for me to get funded on this project. Appreciate your response.

 I must be missing something.  Why can't you deduct taxes on the rental property?

 Tax law says deductibility follows use. That means a cash out refinance on your primary home, if the interest is used to buy a rental property, the interest is deductible against the rental property. If you did a cash out refinance on your primary home and spent the money buying a Lamborghini, then it is not deductible. In order for interest to be deductible, it needs a legitimate business use. The loan is secured against your home, but used to buy a rental property.

Originally posted by @Joe Splitrock :
Originally posted by @Joe Villeneuve:
Originally posted by @Roger Princeau:

@Joe Villeneuve sorry my mistake. The the question is should I cash out refi from my house versus a conventional loan? I should have been clearer but the accountant said if I do a cash out refi from my house I won't be able to deduct taxes on the rental property. I'm trying to figure out which way makes sense in order for me to get funded on this project. Appreciate your response.

 I must be missing something.  Why can't you deduct taxes on the rental property?

 Tax law says deductibility follows use. That means a cash out refinance on your primary home, if the interest is used to buy a rental property, the interest is deductible against the rental property. If you did a cash out refinance on your primary home and spent the money buying a Lamborghini, then it is not deductible. In order for interest to be deductible, it needs a legitimate business use. The loan is secured against your home, but used to buy a rental property.

 That's what I thought too.

If the seller is financing the 50k or 25% of purchase price, why not just go get the conventional loan? Sounds like you’re getting a deal for no money out of pocket.

Only thing is to make sure it still cash flows. You don’t want to be so leveraged on a property that you’re negative each month.

Tucker, i think I'm leaning towards a conventional as you suggested. Originally I was looking at a cash out refi to pull extra cash for other projects. By financing $200k on a $250k house I'm hoping it helps me refi in the next few years. With long-term tenants in place that want to stay i believe it's a solid deal. Thanks for your reply. 

Originally posted by @Roger Princeau :

Matthew, would i need to disclose the $50k seller financing to conventional financier? It's 3 year no interest between me and seller.

Yes, and they will add this to your DTI #. One of the questions on your mortgage app is about any loans not otherwise disclosed on via your credit report. Which is why they'll ask you to explain any recent inquiries to your credit - to make sure you don't have any new obligations that have yet to report. It'll be like a family member lending you the money for a "down payment", in your case $50k.

However, if you take out a refi on your current house, the cash will be in your account prior to purchase of the new home, and the seller can finance 100% or 1% or whatever at that point as the mortgage is already done.