Refinancing a rental home,help with estimating the amount

Apr 12, 2007 1 Replies
7

I have a rental home that no is below $98K @ 6.0% on the mortgage. The current market value is $280K.



I though this would be a good time to take out some equity and refinance at $175K @ 5.5% , but still giving me a 6 figure equity in the home and a mortgage+escrow pmt that is still about $150 below the rental fee.



It seems reasonable to pull out te equity since it is tax free, maybe take a nice vacation for my wife & I, a vehicle for my daughter and invest the remaining.



Does this seem to be a reasonable medium of taking out equity but still keeping the 100K equity in the home. Should I take out more? Less?



This is the first time I have refinanced this property, so I'm trying to get some other opinions on what should be a good procedure for doing this.



Thanks



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M

Not sure what you mean by "tax free". Loan proceeds are always "tax free", just as payments on loan principal are never tax deductible. However the increase in mortgage interest payments you contemplate is NOT a deductible expense of your rental.

Now to the extent you use the cash-out to earn investment income, the interest for that amount could be tax-deductible as investment interest expense. Keep track of the interest on the original mortgage and the increase separately.

Leaving aside the "tax tail", if the "dog" results in a half-percent drop in mortgage rate, that's probably good. The answer to your question really depends on your other sources of funding for a car purchase and whether you can afford a nice vacation.

-Mark Bole

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