<p>We have owned a rental property (single family home) for 9 years. The mortgage is a 30-year fixed at 5.375%, with a current balance of $95,000. Current value of the property is approximately $180,000. The rent is $1200, which more than covers the mortgage and property manager fee, and the tenants have said they plan to stay for at least another year.</p>
<p>I started looking into refinancing with a 20-year fixed, and the mortgage broker I talked to came up with an interesting idea. He suggested doing a cash-out refinance of our residence instead, using the extra money to completely pay off the mortgage on the rental property.</p>
<p>We bought our house 2 years ago for $247,000, with $125,000 down and a 30-year fixed mortgage at 4%. Current balance of the mortgage is $123,000 and current value of the house is approximately $250,000, so equity is not a problem.</p>
<p>I’m a disabled vet so I can get a VA mortgage with no funding fee, but only for my primary residence. Neither current mortgage is from VA. We would end up owning the rental property free and clear, and there would be a $218,000 30-year fixed VA mortgage on our house (approximately 87% loan-to-value, but VA loans don’t require mortgage insurance). The broker hasn’t gotten back to me with the exact quote yet, but he thought it would be around 3.5%.</p>
<p>Does this sound reasonable? Any possible disadvantages? I want to tap into the collective wisdom of CC to see if there’s something I’m missing!</p>
<p>The thing that came to mind immediately is that you won’t have the mortgage interest to deduct as part of your expenses, so your gain will be higher, but you will still be taking property taxes and depreciating the property.</p>
<p>We have 3 years left on our 5% mortgage and my husband just decided to refinance at 3.5%. Sounds crazy to me, but I guess he doesn’t want to give up those mortgage interest deductions. If you refinance with your current mortgage holder, you can avoid most fees.</p>
<p>Regarding deducting mortgage interest—If you are at/near the end of a mortgage, you are paying very little interest–most of the payment goes to principal rather than interest, so there isn’t much gain.</p>
<p>I’m always looking to learn something…OP, can you explain what you will have gained by paying off the rental property, but increasing the mortgage of your residence?</p>
<p>Toledo, are you refinancing a 3 year loan to a longer term loan?</p>
<p>Mortgage interest deductions are overrated.</p>
<p>The deduction is better than not having the deduction, but that doesn’t mean you want a mortgage. </p>
<p>Depends what you do with the money you borrowed. If you have a 3.5 percent mortgage and you can get a higher return than 3.5 percent close to risk free, then maybe you want a mortgage.</p>
<p>If you need to borrow money and the mortgage is the lowest cost of borrowing, then the mortgage might make sense.</p>
<p>Something I have never been able to figure out, no matter how many tables I check out, is whether the mortgage deduction is a greater amount than the interest on the mortgage paid to the bank? Does it depend on circumstances?</p>
<p>Why not consider a 20 yr, or even 15 yr fixed on the primary residence? Sounds like you have the cashflow to cover that, since you’ll only have one rather tan 2 mortgages.</p>
<p>alh, it would depend on the circumstances. However for a rental property the amount paid in interest is taken as a direct expense so it would reduce the income from rents.</p>
You will generally be able to get a lower interest rate rate on a mortgage on your primary residence than on a rental. And depending on your income, you may not be able to take all the rental deductions (which includes the interest) right away. So those are some reasons to roll it into your house.</p>
<p>A balance of $218K on a house worth $250K leaves you only 13% equity left in your house, so I would say equity is a problem. I don’t know much about VA loans, will they let you take out that much equity?</p>
<p>And if you refi your house to 30 years, now you are essentially taking 40 years to pay off the rental.</p>
<p>I would actually go for a 15 or 20 year on the rental, you will be able to get a rate into the mid- to upper 2’s. TD Bank is one place that will give the same rate for a rental as your house, and they don’t charge points.</p>
The mortgage deduction is always exactly the amount paid to the bank in interest.</p>
<p>The deduction can be phased out for a rental property if your income is too high - it starts phasing out when your AGI hits 100K and is gone by $150K, except under very stringent circumstances.</p>
<p>alh, the mortgage interest deduction never saves you more cash than you pay the bank. Best-case scenario, you might save 50 cents on the dollar, but it may save you nothing at all, depending on circumstances.</p>
<p>stevensmama, you may be able to deduct some of the interest on Sch E under the interest tracing regs (1.469), but there’s a gray area for split-use financing when a personal residence is involved. Be aware that the amount used to finance the rental will be an AMT adjustment if deducted on Sch A.</p>
<p>notrichenough: It’s not clear whether the election under Temp. Reg. 1.163-10T(o)(5) to treat debt as not secured by a qualified residence is all or nothing. The IRS hasn’t issued guidance, nor are there any relevant court cases.</p>
<p>If the election may be made dollar-by-dollar, then you just trace to the rental. If the election is all or nothing, tracing a portion to the rental blows the Sch A deduction for the remainder.</p>
<p>“The deduction can be phased out for a rental property if your income is too high - it starts phasing out when your AGI hits 100K and is gone by $150K, except under very stringent circumstances.”</p>
<p>In the example I used, can I lose the ability to deduct that mortgage interest on the rental?</p>
<p>And you can lose part of your depreciation deduction? Can you refuse to take depreciation if you are paying AMT?</p>