Page 1 of 1

Refinance with cash out - letter of explanation for cash out

Posted: Wed Nov 28, 2012 5:14 pm
by markcoop
I'm in process of doing a mortgage refinance with a cash out. I'm being asking by my bank to provide an explanation letter for the reason for the cash out. Anyone know why they would need this information? Does this reason impact the interest on the loan being tax-deductible?

Thanks for any input

Re: Refinance with cash out - letter of explanation for cash

Posted: Wed Nov 28, 2012 5:18 pm
by KyleAAA
They probably want to know if you plan on doing something reckless with the money. I would imagine it might affect the interest rate. Who knows. Never heard of this before.

Re: Refinance with cash out - letter of explanation for cash

Posted: Wed Nov 28, 2012 5:22 pm
by JDCPAEsq
Any time you borrow money the bank wants to know what you plan to do with it. It won't affect the deductibilitiy of the interest, however, unless it exceeds the home equity limitation.
John

Re: Refinance with cash out - letter of explanation for cash

Posted: Wed Nov 28, 2012 5:29 pm
by markcoop
JDCPAEsq wrote:Any time you borrow money the bank wants to know what you plan to do with it. It won't affect the deductibilitiy of the interest, however, unless it exceeds the home equity limitation.
John
So let's assume I'm doing a cash out of $60,000. If I also have a HELOC open and next year spend $50,000 on it, does that mean only interest on $40,000 of the HELOC will be tax deductible since the max total interest deductibilitiy for a HELOC is $100,000?

Thanks for the quick responses.

Re: Refinance with cash out - letter of explanation for cash

Posted: Thu Nov 29, 2012 10:18 am
by markcoop
markcoop wrote:
JDCPAEsq wrote:Any time you borrow money the bank wants to know what you plan to do with it. It won't affect the deductibilitiy of the interest, however, unless it exceeds the home equity limitation.
John
So let's assume I'm doing a cash out of $60,000. If I also have a HELOC open and next year spend $50,000 on it, does that mean only interest on $40,000 of the HELOC will be tax deductible since the max total interest deductibilitiy for a HELOC is $100,000?

Thanks for the quick responses.
I believe I found the answer to my question. If the $60K cash out was used for home related projects, then I can still deduct interest on the full $50K (would be eligible up to $100K). So, as I understand it, up to $100K of HELOC+cash-out-mortgage interest can be deducted for non-home project related items in a given year.

My next question to understand is how the deductible interest piece is computed in following years. For example, lets say my refi+cash out was a total of $160K ($60K of it is the cash out and not used on the house). That means I can deduct another $40K of HELOC interest not used on the house this year. If after 1 year I've paid off $10K of principal. How does that $10K affect the amount of interest I can deduct next year? Would I be able to deduct $50K of HELOC interest (add the full $10K to the $40K), $40K of HELOC interest (add none of the $10K to the $40K) or some prorated value of approximately $44K?

Re: Refinance with cash out - letter of explanation for cash

Posted: Thu Nov 29, 2012 12:00 pm
by Chuck
You could always send them this: http://www.youtube.com/watch?v=sZHCVyllnck