Cashout refinancing and your taxes
A cashout refinance might be eligible for mortgage interest tax deductions so long as you ’ re using the money to improve your property . Some acceptable home improvement projects might include :
• Adding a swimming pool or hot tub to your backyard
• Constructing a new bedroom or bathroom
• Erecting a fence around your home
• Enhancing your roof to make it more effective against the elements
• Replacing windows with storm windows
• Setting up a central air conditioning or heating system
• Installing a home security system
In general , the improvements should add value to your home or make it more accessible . Check with a tax professional to see whether your project is eligible .
Is a cashout refinance right for you ?
Cashout refinancing can be a good idea for many people .
Mortgages currently have among the lowest interest rates of any type of loan . The collateral involved — your home — means that lenders take on relatively little risk and can afford to keep interest rates low . This is especially true in today ’ s lowrate environment .
Both a cashout refinance and a home equity loan allow borrowers to tap their home ’ s equity , but there are some major differences .
That means that cash-out refinancing is one of the cheapest ways to pay for large expenses . Most homeowners use the proceeds for the following reasons :
• Investment purposes : Cashout refinances offer homeowners access to capital to help build their retirement savings or purchase an
investment property .
• Highinterest debt consolidation : Refinance rates tend to be lower compared to other forms of debt like
credit cards . The proceeds from a cashout refinance allow you to pay these debts off and pay the loan back with one , lowercost monthly payment instead .
• Child ’ s college education : Education is expensive , so tapping into home equity to pay for college can make sense if the refinance rate is much lower than the rate for a student loan .
Cashout refinancing vs . home equity loan
Alternatives to cashout refinancing
In addition to a home equity loan , consider these other options :
HELOC
A home equity line of credit , or HELOC , allows you to borrow money when you need to with a revolving line of credit , similar to a credit card . This can be useful if you need the money over a few years for a renovation project spread out over time . HELOC interest rates are variable and change with the prime rate .
Personal loan
A personal loan is a shorterterm loan that provides funds for virtually any purpose . Personal loan interest rates vary widely and can depend on your credit , but the money borrowed is typically repaid with a monthly payment , like a mortgage .
Reverse mortgage
A reverse mortgage allows homeowners aged 62 and up to withdraw cash from their homes , and the balance does not have to be repaid as long as the borrower lives in and maintains the home and pays their property taxes and homeowners insurance .
MEET ZACH WCHTER
Zach Wichter is a mortgage reporter at Bankrate . He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news , and covered aviation for The Points Guy .
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