Q: We currently have $214,000 balance remaining on our 15-year mortgage at 6.125 percent.
Our home is worth $800,000 to $900,000. We would like to borrow against our equity and use the cash as a down payment on a new home.
What is the most we can borrow and still have our interest payments be tax deductible? We would need more than the $100,000 in home equity to make a down payment on the investment property. Is a cash-out refinance the best way to go for us?
We are in a high tax bracket and would like take advantage of interest deductibility.
A: Current tax law allows you to borrow up to $1 million on a first mortgage and up to $100,000 on a home equity loan and still deduct the interest paid.
What you may want to do is refinance your 15-year mortgage to incorporate the new amount you want to borrow. As we went to press, 15-year mortgages were being offered for about 5.5 percent, which is less than what you’re currently paying.
The “jumbo loan” threshhold has risen to $417,000. So you could borrow an additional $203,000 and still not exceed the $417,000 for a conventional loan. I’ll assume for the moment that you can afford the payments on a $417,000 loan.
When it comes to tax deductibility, you need to be aware that your ability to deduct mortgage interest starts to phase out when your adjusted gross income hits around $275,000. And, there is always the persistent Alternative Minimum Tax (AMT) threat as well.
But when it comes to investment real estate, the real bonus is being able to write off your expenses against income that the property generates. Please talk to your accountant about the various deductions that are permitted.
Published: Mar 2, 2006
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