If you’re refinancing your mortgage, you may pocket some cash, too, with so-called “cash-out” refinancing. Say you bought a house a few years ago with an 8 percent, $200,000 mortgage. Now your balance has been paid down to $180,000 and mortgage rates have fallen to 7 percent.
If your house is now appraised at $300,000 and you have a $180,000 mortgage balance, you have $120,000 worth of home equity. A lender might be willing to lend you $240,000 instead of $180,000. Now you can pay off the old $180,000 loan and have $60,000 in extra cash. You’ll be paying off a larger loan but lower interest rates will help hold down your costs.
How will the interest you pay on such a loan be taxed?
Interest on the first $180,000, the balance of your old loan, is treated as “acquisition debt.” As long as it’s secured by a residence, the interest on that amount will be deductible.
If you use the extra $60,000 for non-housing purposes, that’s treated as “home equity debt.” The interest on up to $100,000 worth of home equity debt is deductible. In this example, all of your interest payments will be deductible.
