Cash out refinance question?

[disney5]

We want to buy a second summer home ($200,000). Our concern is that we don't want to do a second mortgage as it is not our primary residence and we wouldn't be able to deduct the interest.
So our option is to to do a cash our refinance on our current home (9yrs left with only $154,000 balance at 4.5% ..is a 15yr fixed)
My problem is I don't want to lose the 4.5%!!!!!
Current 15 yr rate on this refinance is 5 1/8% with my current mort. company.
I checked about just increasing my home equity line of credit..they do not issue new ones anymore

So my question is...any other ideas out there???

 

[cay2420]

If you are concerned with not being able to write off your interest by doing a mortgage on your second home then why not do a cash out refinance on your primary residence with a 30 year fixed loan. If you pay off your mortgage you are going to lose that write off as well. This way you can ammortize the loan over 30 years and keep the payments down as well as have a nice write off. I am in the business and that would be my suggestion. Good Luck!

 

[disney5]

That is what we are considering...doing a cash out refinance on our primary home and then using the extra $$ to pay for second home (this way we could write off interest)

Mortg. company said we would have to take out the 154,000 that is owed and add the $200,000 we need for a total of 354,000 new mortgage.

The bummer is I have 9 yrs left at 4.5% and now will be going back to 15yr at 5 1/8...but then again we will have a home to retire to when the kiddies are out of college!!!

 

[cay2420]

Gotcha, but if you do another 15 year loan your monthly payments will be higher than if you did a 30 year fixed. As nice as it would be to pay off the house in 15 years, you would also lose your tax write off by doing that. The good thing is that it sounds like you have enough equity to take that cash out. I am seeing a lot of people that are in some bad situations right now. Actually, you may want to double check but I just checked the IRS website to verify that you can write off interest on a second home but not an investment property. So long as you don't rent it out, you can write off the interest.

 

[PatsMom]

Who told you that interest for a mortgage on a second home wasn't deductible? According to IRS Publication 936 mortgage interest for a second home is deductible (points may not be - I didn't take time to look that up). You should double check with your own accountant since I am not one but generally mortgage interest for a vacation home is deductible.

Now if you are talking about a rental property, the rules are entirely different.

 

[cay2420]

Qualified Home
For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.

Main home. You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home. A second home is a home that you choose to treat as your second home.

Second home not rented out. If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year.

Second home rented out. If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home. For information on residential rental property, see Publication 527.

 

[CyndiLooWho]

I'm an accountant, and the pp is absolutely right. A second home is eligible for the mortgage interest deduction. Check with your accountant to be sure there isn't some weird exclusion that you fall into, but I don't think there are any problems with deducting your second home mortgage interest.

 

[xmlguy]

Which is better: a 100% bad decision, or a 60% bad decision?

Answer: Neither, they are both bad decisions.

The interest payment deduction is the biggest scam in the history of the USA. It makes you think that paying a lot in interest to banks is actually a good thing, when it is a bad thing in reality.

One figure that matters most is the total interest you pay for your properties vs. the principal over the total period you own them.

The banks and most realtors have a big incentive to have you pay the most interest possible over the life of the loan. Banks are the direct beneficiary. Realtors get higher commission payments for higher property sales, regardless of how much interest you pay. That's why many, if not most realtors try to get you "the most house that you can afford", meaning the highest possible house price at the maximum allowable monthly payment you have been approved for. That's why 30 and 40+ year loans exist. There is no rational reason why it should take 30+ years to pay off a house. You will always be paying more in interest than you do in principal with these loans, and at a higher interest rate to boot.

If you refinance your existing loan that has excellent terms, then you are paying loan origination fees to get something worse. Is that a bargain? To pay extra for something worse is a bad deal, period.

I can't tell you whether it's a good financial decision to buy a $200,000 summer home. That depends on how much free cash and income you have above and beyond your current mortgage payment. It also depends on the true market value of the summer home vs. the price you pay, as well as any continuing devaluation of the price in this market. As a general rule, I think you should be able to afford sufficient payments to pay off all your mortgages in 8-9 years, with 15 year mortgages. I doubt you will hear this recommendation from anyone else. That's because the goal is to reduce the total amount of interest you pay, which is only in your best _interest_ and contrary to everyone else who is trying to make money off of you.

For example, if you make a $3,000/mos payment on your current house, it will be paid off in only 4 years. It will cut the total interest you pay vs. the 9 remaining years by more than 50%. That will save you about $20,000. The extra $1,800/mos you pay (approx) comes to about $87,000 over four years.

Will you be more financially secure with one house that's paid off in 4 years, or owning two houses with a large mortgage with another 11 years remaining? If you lose all your income, which option will most likely result in foreclosure, eviction and bankruptcy? If you don't buy the summer house now, do you think they will all appreciate tremendously in 4 years, with the fresh memory of the recent real-estate crash? Or is it more likely that the prices will fall some more and then stabilize for a while before more slowly increasing than the last boom that was caused by massive speculation and easy credit? Look at the number of interest rate resets that are still pending to occur in the next four years. There is a large number of foreclosures still waiting to hit the market.

 

[linmc1129]

Which is better: a 100% bad decision, or a 60% bad decision?



"The banks and most realtors have a big incentive to have you pay the most interest possible over the life of the loan. Banks are the direct beneficiary. Realtors get higher commission payments for higher property sales, regardless of how much interest you pay. That's why many, if not most realtors try to get you "the most house that you can afford", meaning the highest possible house price at the maximum allowable monthly payment you have been approved for. That's why 30 and 40+ year loans exist. There is no rational reason why it should take 30+ years to pay off a house. You will always be paying more in interest than you do in principal with these loans, and at a higher interest rate to boot."





Not all realtors are out to get you to buy the most you can afford. There are some good guys out there-my DH being one of them!

 

[xmlguy]

My DH is a realtor and he would never suggest someone spend more than he could afford or feel comfortable spending. In fact he suggests they talk to a mortgage broker first and then decide what they are comfortable with, even if it's less than the mortgage broker says they are qualified for. Not all realtors try to get you to spend more! I would think most ethical realtors would not do this, but I'm sure there are some out there.

It's alway nice to find a good realtor. Hope you keep him.

Unfortunately, I have seen too many examples of foreclosures of buyers who were clearly unqualified by any rational criterea to buy the properties they were sold, each one having an agent that collected their commissions at closing. The amount of fraud I've seen is staggering. Nearly everytime I check tax records I see the evidence of silent 2nds to avoid PMI, huge cash-out refinancing with no payments thereafter, no payments after teaser-rates and other rates reset, and no payments of property tax after assessments. These owners couldn't even afford the property tax - much less the true interest, principal, and PMI. Many are NINJA loans - no income, no job or assets. The government should go after the past commissions of all those agents.

 

[Bren's Mom]

Honestly, if I had 9 years left on a loan at 4.5% and enough income to consider a 2nd $200k home I would just figure the cost of the new home and make that payment every month to my current home in addition to the required monthly payment. Once my primary home was paid off THEN and only then would I would consider purchasing a new home.

 

[Mom of three]

Keep in mind also that rates for a second home and/or rental tend to be higher than that of a primary residence.

I think there is a LOT of good advice that others have given to take into consideration when making this decision.

Now let me ask you this: Is this second home a need or a want? Reason being is that if you can afford the extra payment, why not put that extra towards the principal and get your primary home paid off in 7 years rather than 15? Maybe just wait it out???

However, that rate is pretty good considering all the activity with the market in the past week. Rates actually went up and even the most favorable borrowers will have a hard time finding that rate. Just be sure they can deliver as promised.

Good luck.