2. Home equity loan and line of credit

  • Home equity loan
    • A consumer loan secured by a second mortgage, allowing home owners to borrow against their equity in the home. The loan is based on the difference between the homeowner's equity and the home's current market value.
    • Limit on deductibility of home equity debt: $100,000 for loan not associated with purchase, construction or improvement of the home. ($50,000 for married filing separate). Interest on loan amounts above the limit are treated as nondeductible personal interest.
      • Also known as "equity loan" or "second mortgage".
  • Home equity line of credit (HELOC)
    • A line of credit extended to a homeowner that uses the borrower's home as collateral. Once a maximum loan balance is established, the homeowner may draw on the line of credit at his or her discretion. Interest is charged on a predetermined variable rate, which is usually based on prevailing prime rates.
      • Once there is a balance owing on the loan, the homeowner can choose the repayment schedule as long as minimum interest payments are made monthly. The term of a HELOC can last anywhere from less than five years to more than 20 years, at the end of which all balances must be paid in full.
      • $100,000 deductibility applies.

3. Refinancing cost-benefit analysis
  • Monthly benefits from refinancing
    • Current monthly mortgage payment
    • - Mortgage payment after refinancing
      Monthly savings
    • - Income tax on monthly savings
      After-tax monthly savings
  • Cost of refinancing
    • Total after-tax closing costs
  • Number of months needed to break even
    • Total after-tax closing costs / After-tax monthly savings

4. Reverse mortgage
A special type of loan used to convert the equity in a home into cash. The money obtained through a reverse mortgage is usually used to provide seniors with cash flow in their retirement years.

The reverse mortgage is aptly named because the payment stream is reversed. Instead of the borrower making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the borrower. While a reverse mortgage loan is outstanding, the borrower owns the home and holds title to it, without having to make any monthly mortgage payments.


Financial institutions: Banks

Related Articles
  1. Personal Finance

    Reverse Mortgage Pros and Cons

    It's a way to use your home equity for help when you're older. But does it make sense for your family? Here's how to tell and how to protect your spouse.
  2. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  3. Personal Finance

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  4. Retirement

    How Does A Reverse Mortgage Work?

    A homeowner who’s at least 62 years old can use a reverse mortgage to tap into her home’s equity for money. The house serves as the loan’s collateral. The loan is repaid when the homeowner dies, ...
  5. Retirement

    The Reverse Mortgage: A Retirement Tool

    Discover another way to fund your retirement without having to make payments on a loan.
  6. Retirement

    Additional Streams of Income for Seniors

    Find out how a reverse mortgage can work in your favor during retirement.
  7. Personal Finance

    7 Mortgage Trends To Expect In 2011

    How will the year compare to 2010? What's likely to be different?
  8. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  9. Personal Finance

    When (And When Not) to Refinance Your Mortgage

    There are both good and bad reasons to refinance. Learn more about both here.
  10. Managing Wealth

    Reverse Mortgages: How They Can Cushion Retirement

    Reverse mortgages can add some wiggle room to your retirement budget. Here's the lowdown on how to use them — and how not to.
Frequently Asked Questions
  1. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  2. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
  4. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ...
Trading Center