Property Taxes May Be Due
If youre refinancing a home loan between October 1st and January 31st this article is applicable to you. In Texas the property taxes are technically due as soon as they post in early October. Once the county posts the taxes the money is due but the payment is not considered late until after January 31st. Therefore, if youre closing on a refinance home loan and the property taxes show due and payable, those taxes will have to be satisfied at closing no matter what.
How To Determine A Fair Market Value
- Overall condition: The appraiser will examine the interior and exterior of the home and look for any damage.
- Curb appeal: This refers to the general attractiveness of the property and its surroundings, including painting, landscaping and other aesthetics.
- Size: Factors such as square footage, number of bedrooms and lot size also are considered.
- Amenities: If your property features certain extras such as a pool, includes major appliances or is retrofitted with certain energy-saving features, these could factor into the overall value.
- Comparable properties: The appraiser will look at how much properties in the area with similar features sold recently. The appraisal should fall into the same ballpark.
- Buyerâs or sellerâs market: The overall state of supply and demand in the market will also play a role in your homeâs value. If there is a glut of homes on the market, values will decrease. On the other hand, if demand is high, values can be inflated.
Tax Deductions And Refinancing
Are refinancing costs tax deductible? The IRS allows homeowners to deduct some of the interest paid on their mortgage debt on a primary home, secondary home or both. If you have a $650,000 mortgage on your primary home, for example, and $350,000 on a vacation home, you may be able to deduct all of your mortgage interest.
When it comes to refinance tax deductions, the same rule applies. If you choose to refinance one or even both of your mortgages, you may be able to deduct all of your mortgage interest as long as your combined mortgage principal does not exceed the limit of $1 million for married couples and $500,000 if filing separately or as a single filer.
However, there are certain requirements for what your refinance cash can be used for to be eligible for a deduction. We cover these requirements in greater detail below.
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Types Of Mortgage Refinancing
There are a wide range of mortgage refinancing options you can select from when you want to refinance your current mortgage. The types of refinance loans available to you include:
- Conventional refinance
- Cash-out refinance
- Streamline refinance
A conventional refinance loan is designed to replace any type of mortgage loan with a conventional refinance loan, which should allow you to obtain a lower interest rate compared to the one you previously had.
As long as you have at least 20% home equity when you refinancing your home with this option, you wont need to purchase private mortgage insurance. Keep in mind that the interest rates for a 30-year refinance loan will be higher than the ones for a 15-year refinance loan.
Rate-and term refinancing is available if you want to change your mortgage rate, loan term, or other details of your current mortgage. Since these refinance loans are provided for several different reasons, youll have numerous options at your disposal if you choose to apply for a rate-and-term refinancing loan. For instance, you could choose to refinance a 30-year mortgage into a 15-year one.
If you have a 30-year mortgage at an interest rate of 5%, you could switch to a 30-year mortgage at a rate of 3%. You could also change from a 30-year mortgage to a 15-year mortgage that has a lower interest rate. Although a conventional refinance mortgage is more popular, rate-and-term refinance loans are also common among homeowners in the U.S.
Transferring & Refinancing Property
- In the event that the settlement payment is made prior to the mortgage lender , then there is no need for the seller to request a refund from the county, because the money will automatically be returned to the lender. The seller would need to contact their lender for a refund.
- In the event that the settlement payment is made after the mortgage lender, there may be a need for the seller to request a refund from the county.
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Tax Implications Of A Cash
You might use the money from a cash-out refinance to improve or repair a rental property that you manage. You can deduct these expenses from your federal taxes. Any improvements or repairs you make to a property you rent out are almost always tax deductible. This is because the IRS considers any money you earn from rent as personal income. You can also deduct closing costs, interest and insurance you pay on a rental property from your income as business expenses.
Paying Off Debts And Refinancing
Can you use a refinance to pay off other debts? While the interest you pay on your mortgage may be tax deductible, you may not be able to deduct the interest you pay on other debts. If you want to convert the interest you pay on a credit card, for example, you may be able to roll this debt into your mortgage through a cash-out refinance. The rate for a mortgage is often lower than rates for other types of debt.
If you use a cash-out refinance to pay other debts, then for tax purposes, the funds you borrow are considered a home equity loan. This means the funds are subjected to the limits of a home equity loan in terms of how much you can deduct.
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Property Tax Assessed Value Vs Refinancing Value
In a cash-out refinance, you replace your current home loan with a new one and get a wad of cash to stick in your pocket as part of the deal. A cash-out refinance will change the amount you owe on your home, but it won’t automatically change the value used to calculate your property taxes. That said, this kind of loan, under certain circumstances, may indirectly affect your property tax.
Improve A Rental Property
If you own a rental property, you may want to use your cash-out refinance money to repair or enhance the property. You may be able to deduct the expenses of a repair or improvement from your taxes.
You may be able to claim a deduction for a rental property because the IRS considers money you earn from a rental property as personal income. Further, you may be able to deduct interest, insurance and closing costs paid on a rental property from your income taxes as business expenses.
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Does Refinancing Affect Your Taxes
Homeowners may choose to refinance for many reasons. Refinancing could potentially lower your monthly payments, allow you to consolidate debt, speed up the payoff process for your mortgage, eliminate your private mortgage insurance and put more cash in your pocket. If you have equity in your home, you may be able to leverage it through a refinance.
Topics Covered
Your home is likely your largest asset and most long-term investment, and refinancing your mortgage may allow you to get the most out of your investment. When you refinance, you can use the cash for:
- Family expenses: Your family expenses may have changed recently if you started a family or your child is heading to college. This may leave you needing more cash each month, and if you choose to refinance, this can help you adapt to these life changes.
- Home improvements: With a cash-out refinance, you can finally tackle those home improvements. No matter whether you want to put a new roof on your home or build an addition, when you refinance, you can free up more cash that can be put toward these renovations.
- Cost of living: Your cost of living may have changed since you purchased your home, particularly if you have taken a new job or your family has grown. Refinancing can make your mortgage more affordable and help you meet your financial obligations.
- Cash in your pocket: You may want more cash in your pocket to put toward investing or saving.
Does Refinancing Affect Property Taxes
If youre concerned that refinancing your mortgage will lead to unwanted changes in your property taxes, you can rest easy: Refinancing will not actually increase your bill, at least directly.
If youre doing a cash-out refinance, refinancing can impact your property taxes if youre using those funds for a remodel. Thats because a construction project could trigger a reassessment.
Its also important to understand that a new mortgage will come with new terms that can impact how you set aside cash from your budget for property taxes, says Lisa Greene-Lewis, CPA and tax expert at TurboTax.
Homeowners need to consider whether the new loan will require them to impound their property taxes, meaning pay them every month with the loan payment or whether they will pay them twice a year outside of the loan, Greene-Lewis says. This is a consideration as it may depend on your finances and your stream of income. Some people prefer to pay their property taxes twice a year instead of having that bump out of their pocket every month.
If youre going with a new lender, though, that lender might have different escrow requirements altogether, and you might need to fund the escrow account in advance of the old lender refunding the balance. Some lenders dont give borrowers the option to self-pay property taxes, either.
Whether your property taxes are impounded monthly or paid twice a year, you can still deduct up to $10,000 in total state and local property taxes, Greene-Lewis says.
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Refinancing Does Not Cause Your Property Taxes To Go Up
do your property taxes go up in California when you refinance your property?
This is one of those urban legends. People are concerned that because the house is appraised by the lender, the assessor is somehow going to find out that their property is worth more and send their tax bill soaring.
However, thanks to Proposition 13 in California, the formula for property taxes has little to do with current market value or what the home is really worth. The formula is based upon the purchase price plus two percent per year, compounded. If you can document that your home is worth less than this amount, contact your county assessor’s office. But if it’s worth more, they cannot increase it beyond this number.
Indeed, certain family transfers can preserve this lower tax basis. Mom and dad deed it to the kids, and the kids keep paying taxes on it based upon a purchase price of perhaps $60,000 when comparable homes may be selling for $600,000.
Caveat Emptor
Mortgage Interest And Itemizing Deductions
Keep in mind that if you refinance your mortgage, this may decrease your total tax deductions significantly. When you are able to refinance to a lower rate, you may pay less interest, meaning you will have less mortgage interest that can be deducted at tax time.
Your interest costs can reduce substantially if you switch to a 15-year mortgage with a 3% interest rate from a 30-year mortgage with a 5% interest rate. Along with a lower rate, a shorter term can mean your interest costs fall faster over the coming years, also decreasing the amount you can deduct.
For many homeowners, their mortgage interest deduction is the factor that leads them to itemize deductions. Unless your deductions can exceed what you would receive from the standard deduction, there may be no point in itemizing. Revised benchmarks for deductions may decrease the chance that you will gain tax savings from a refinance when you itemize deductions. A tax preparer can help you determine whether itemizing or taking the standard deduction is a better financial option for you.
Overall, you may be saving money by reducing your interest costs, regardless of whether you can deduct your costs at tax time. However, you may want to anticipate that if you refinance, your deduction may be a smaller amount than you expected.
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Paying Property Taxes And Other Costs When Refinancing
Refinancing will feel fairly similar to when you closed your first mortgage, and you might need to consider how to budget for property taxes and homeowners insurance in your closing costs this time around, too.
Depending on when the loan closes, borrowers could be required to pay property taxes through escrow, Greene-Lewis says.
This will vary based on where you live. For example, in Illinois, property taxes are typically due on June 1 and September 1. In Arizona, the due dates for installments are November 1 and March 1.
As you prepare to set aside money for your refinance closing costs, youll need to determine if your current lender has already made your property tax payment. Review your escrow transaction history to see if your lender has paid the bill, or ask the lender for proof of payment. You can also verify payment with your local tax authority. If youre switching lenders, make sure the new lender has a record that your property taxes have been paid to avoid a larger-than-necessary set of closing costs.
For homeowners insurance, youll likely need to update your policy if the appraised value of your home has changed. If youre refinancing your mortgage with a new lender, youll need to update your policy with that lenders information.
Understanding Property Taxes And Why They Increase
If youre a first-time homeowner, you might still be a little unclear about the ins and outs of property taxes they can even be a bit confusing for longtime homeowners, especially when they notice a sudden property tax increase. Here, well explain how property taxes work, what can cause them to go up, and the potential steps you can take to decrease them.
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What Is A Cash Out Refinance
A cash out refinance is a strategy used by investors and homeowners to turn accrued equity in a home into cash. Instead of selling a home outright, a cash out refinance replaces an existing loan with a new mortgage that is greater than what is owed on the house.
Heres a simple example of how a cash out refinance might work:
- Current fair market value of home $250,000
- Current mortgage balance $150,000
- Equity in the home $100,000
- New loan amount $200,000
Based on this example, an investor or homeowner would be able to pull a maximum of $50,000 in cash out of the property by doing a cash out refinance. The amount is calculated by subtracting the previous mortgage balance of $150,000 from the new mortgage amount of $200,000.
How Long Do I Have To Live In My House To Avoid Capital Gains Tax
To get around the capital gains tax, you need to live in your primary residence at least two of the five years before you sell it. Note that this does not mean you have to own the property for a minimum of 5 years, however. Once you’ve lived in the property for at least 2 years, you’d reach capital gains tax exemption.
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Factors That Impact Property Taxes
So, what does impact your property tax bill? The most important factor is your homes assessed value, which is not the same as the fair market value or appraised value. For one, assessors have their own methodology that differs from that of appraisers, and while your home will be appraised in the process of refinancing, the results of the appraisal are shared with your mortgage lender, not the local tax authority.
Lets say your homes assessed value on your most recent property tax bill was $368,000, while the appraised value is $430,000. Your property taxes would be calculated using the $368,000 figure. Then, your local tax authority will review other assessments in the area, along with the local annual budget, to set property tax rates, also known as mill rates. Even if your home assesses at a lower value, your taxes can still rise if the budget does.
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Supply Your Own Research
You canât simply tell the appraiser that you feel like their valuation is wrong and expect them to change it. In order to get an appraisal redone, youâll need to provide a point of comparison that shows the original value is off.
For example, if you can point to another home in your neighborhood thatâs very similar to yours and sold for higher than your home is valued, you should contact your lender and ask that the appraisal be reconsidered.
Second Mortgage Tax Implications
Suppose you opt for a second mortgage ) instead of a cash-out refinance. Are you still able to deduct mortgage interest?
Once again, that depends on what you use the funds for. If you buy or significantly improve a home, you probably can. But, if you borrow for other purposes you almost certainly wont.
The IRSs Publication 936 Home Mortgage Interest Deduction gives full details.
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