Thursday, January 1, 2009

When Is It Time To Refinance to Cash Out a Large Amount of Home Equity? (Part 5 of 6)

There are some pretty financially savvy people out there carefully watching what the markets are doing, including the bond markets and mortgage interest rates. Over the years, they’ve listened carefully to their financial/tax advisors and have educated themselves, keeping up with what these markets are doing. They caught the wave of low interest rates several years ago, and already have a nice low fixed rate on their mortgage.

But, the time has come for them to take some equity out of their home/property, maybe for one of the reasons listed in Part 3 of 6 of this series of articles. If they already have an interest rate of 4.5%, and the interest rate they might qualify for today is 4.625-5%, why would they want to refinance? Should they instead take a 2nd mortgage loan or line of credit? Should they just sell their home/property and pay those closing costs instead?

Once again, several variables need to be considered:
  • How much cash out will they need, and for what purpose? What tax ramifications are they facing for this purpose (contact your tax professional!)?
  • What is the “blended rate” if the cash out was taken in the form of a 2nd mortgage?
  • What is the difference in closing costs between taking a 1st mortgage and a 2nd mortgage based on the lower loan amount, or a “no cost” home equity line of credit?
  • If the property securing this loan will be eventually sold, what is that projected sale date?
  • If the property being refinanced will be held long term, where is the owner in their amortization schedule on their existing mortgage?

Now I’ve said this over and over again, but under this reason for refinancing you especially need to talk to your tax professional before you subject yourself to tax consequences and incur unforeseen or avoidable tax liabilities. Believe me, I speak from experience, having incurred an unnecessary capital gains tax liability on a transaction I did in 1989 without consulting my tax advisor. One of those really expensive school of hard knocks lessons I’d like to see others avoid!

See you at the closing table!
Karen Cooper – OR/CA Mortgage Consultant –

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