There are a number of readers who eventually send in the same questions that led me to this column. I am not sure why there is as much confusion over this financial tool as there is but nevertheless I am going to try to clear up some of the confusion. Much of it has to do with taxation and I shall start with that subject.

Many years ago I was working with a notable celebrity who was having tax problems (not my field) and was in need of some mortgage counseling as this borrower's credit had suffered. As April 15th came closer I was asking about the current income and found that it was derived by this person by adding up the deposits in the check book. I knew that earlier in the previous year there had been a cash out refinance and I asked if that was included in the addition of deposits from the check book. Much to my horror it had been and the belief was that a refinance was income and therefore a taxable event. NO, cash out refinance is a loan to yourself from your equity and never a taxable event. In the aforementioned case this had been going on for years and we quickly amended years of tax returns to relieve an on going IRS probe.

A cash out refinance doesn't affect your property taxes as it doesn't change the value of the property. Some states do have taxes on refinancing (New York for one) but it isn't a tax associated with the change in the value of the property. Property taxes are certainly affected by construction to the property but the loan isn't the trigger, the building permits are.

Can a cash out refinance end up being a taxable event in any way? When you sell your primary residence, if you have lived there for the past two years (simplified for the example) you get $250,000 exclusion if you are single and a $500,000 exclusion if you are married on the profits. You calculate the profits by taking the net sales price and subtracting the cost of the property and the cost of any improvements or additions you made. If your profit exceeds the $250,000 or $500,000 stated above you owe capital gains on the difference. If you have subsequently pulled out most of the money from the house in a cash out refinance then you actually could end up owing money that came from the refinance. Remember, it wasn't the refinance that caused the taxable income, it was the sale.

Writers note: I am not an expert on every state's tax policy on real property so please check with your tax adviser before taking any action that could cause you to have a taxable event.

Qualifying for a loan has many people confused, upset and nervous. This happens because most borrowers are not familiar with the various ways to qualify for a loan. Unfortunately many in this industry aren't familiar as well which can cause much of the confusion.

Let's start with the newest phenomenon in the industry: automated underwriting (AUS). If you have a high credit score and a very low loan to value, 60% or less, you generally will pass if your loan is within the conforming limits, $417,000 for a single family residence. You will receive an approved eligible rating and few, if any conditions. If you have a jumbo loan up to generally $1 million you can get an accept ineligible (not eligible for a conforming loan). The conditions on these approvals can be as little as a verbal verification of employment (we call your employer and verify you are still an employee), a bank statement showing some small amount of reserves or a verification of the deposit you have in your bank for the down payment if it is a purchase.

The automated systems are the most popular for the loan companies and the borrowers as all that is added to the package is the appraisal (the credit report is in the automated system) and you are ready to close. Continued...