A readvanceable mortgage may be worth considering when you move to a new primary residence and keep your current home as a rental.
The setup is arranged on the new home. Rental cash damming does not require a special mortgage on the property being rented.
How a readvanceable mortgage fits
A readvanceable mortgage generally combines an amortizing mortgage with one or more secured borrowing components.
As the principal mortgage balance is reduced, borrowing room may become available through the attached component. Product features vary, so the structure needs to match the intended cash flow.
For rental cash damming, a separate borrowing component is used for eligible rental expenses.
How the rent is redirected
Assume these are example numbers:
- Rent from the former home: $2,500 per month
- Eligible rental expenses: $2,500 per month
- New primary residence mortgage: $400,000
- Remaining amortization: 25 years
Instead of using the rent to pay the rental expenses directly, the $2,500 is first applied against the new primary residence mortgage.
The landlord then borrows $2,500 through the separate rental component and uses it for eligible rental expenses.
What actually changes
The process does not reduce total debt by $2,500 each month.
It reduces non-deductible primary residence mortgage debt while adding separately tracked borrowing used for the rental. Interest on that borrowing becomes tax-deductible when the requirements are met and the funds are properly used and tracked.
Where the acceleration comes from
If the rental-related interest creates an allowable deduction, that deduction may reduce the owner’s income tax and produce tax savings or a refund that would not otherwise exist.
If those tax savings are then applied as an additional lump-sum payment against the non-deductible primary residence mortgage, that extra payment can accelerate the mortgage paydown.
Results depend on the owner’s marginal tax rate, interest costs, eligible use, documentation and tax treatment.
Keep the tracking clean
The rental component should not be used for personal spending. Separate accounts and clear records help show how every borrowed dollar was used.
A mortgage broker arranges the mortgage and borrowing components. An accountant or qualified tax professional confirms eligible expenses, tax treatment and bookkeeping.
This is general information and is not tax, legal, accounting or investment advice.
CTA:
Book a call to review the new primary residence mortgage before completing your move.
CTA URL:
https://calendly.com/mortgage_call/discovery-call-with-greg