Am I Taxed on a Cash-Out Refinance?

5 min read

An open-concept modern living room and kitchen

A cash-out refinance is an opportunity to take advantage of your current home equity to put money toward home renovations, kid's college, vacation, or debt consolidation. With the endless possibilities of what you can do with your equity, you may be wondering if you have to pay taxes on a cash-out refinance. In short, no—but you will be responsible for some fees. Let’s take a closer look at what a cash-out is and how it impacts you.

What is a Cash-Out Refinance?

A cash-out is refinancing your current home loan to a new extended mortgage while withdrawing some of your earned equity. You can have a refinanced loan worth up to 80% of your entire home's value. For example, if you own a home valued at $1,000,000 and your current loan is $500K, you can “cash out” up to $300K in equity. In this example, your lender would write a new mortgage agreement for $800K, covering the $500K you originally owed and the $300K cash you just borrowed.

Your equity cash-out and loan amount now become your new loan and monthly payments. It’s important to remember that your cash-out isn’t income. It’s money you’re borrowing from a bank using your house as collateral. Since your cash-out refinance is a new loan, it does not affect how much you pay in taxes at the end of the year.

What Fees Do I Pay for a Refinance?

You will have to pay closing costs and a new appraisal for a refinance. Although the value assessment does not impact insurance or property taxes, it is beneficial for the value of your home to be up to date when deciding how much equity is in your home. Your interest rate will change with your new loan, which could benefit you more if current rates are lower than your old rate.

Do I Have to Pay Taxes on a Cash-Out Refinance?

The simple answer is no. The government considers a cash-out refinance a loan or line of credit, so there are no additional tax payments involved. You can use all the money for whatever you want without being taxed.

Home renovations to your house can be tax-deductible. Your cash-out refinance interest payment does affect your taxes if you spend your equity money on major home renovations or energy-efficient upgrades. Keep your receipts and work orders if you plan to use your equity on home upgrades to deduct your equity interest payments on your yearly taxes.

Cake's Simple Approval Process

Cake makes it easy to get approved for your cash-out refinance. Our three-step process will have you spending your equity cash in no time. Since you don't have to pay taxes on your cash-out refinance, you can rest assured our expert lenders will get you the most money for your home's value. Start your refinancing application now.