Financing Strategies - Mortgage Financing 2

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. Retirement

    Reverse Mortgage Or Home-Equity Loan?

    If you have equity in your home and need more cash in retirement, a reverse mortgage – or home-equity loan or line of credit – is an obvious option.
  2. Credit & Loans

    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.
  3. Home & Auto

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  4. Home & Auto

    The Smartest Way to Tap Your Home Equity

    Using your home as a source of funds can be a smart choice in some situations. Just be sure to carefully run the numbers.
  5. Home & Auto

    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, ...
  6. Home & Auto

    Financing Basics For First-Time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  7. Home & Auto

    When (And When Not) to Refinance Your Mortgage

    There are both good and bad reasons to refinance. Learn more about both here.
  8. Retirement

    5 Top Alternatives To A Reverse Mortgage

    If you have substantial home equity and don't want to do a reverse mortgage to tap it for retirement expenses, cost out these viable alternatives.
  9. Home & Auto

    7 Mortgage Trends To Expect In 2011

    How will the year compare to 2010? What's likely to be different?
  10. Options & Futures

    The Reverse Mortgage: A Retirement Tool

    Discover another way to fund your retirement without having to make payments on a loan.
RELATED TERMS
  1. Home-Equity Loan

    A consumer loan secured by a second mortgage, allowing home owners ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against ...
  3. Home Mortgage

    A loan given by a bank, mortgage company or other financial institution ...
  4. Combination Loan

    1. A transaction consisting of two separate loans for the same ...
  5. Term Payment Plan

    An option for receiving reverse mortgage proceeds that gives ...
  6. Home Equity Conversion Mortgage ...

    A type of Federal Housing Administration (FHA) insured reverse ...
RELATED FAQS
  1. How does the loan-to-value ratio affect my mortgage payments?

    Understand what the loan to value ratio is, how the ratio is calculated and learn how it has an impact on your mortgage payments ... Read Answer >>
  2. What are the requirements to apply for a reverse mortgage loan?

    For homeowners of a certain age who wish to stay in their homes but are finding it costly, a reverse mortgage could be the ... Read Answer >>
  3. What are the differences between a home equity line of credit (HELOC) and a home ...

    Learn the differences between a home equity loan and a home equity line of credit, and find out how to select the one that ... Read Answer >>
  4. What’s the difference between a mortgage lender and a mortgage servicer?

    Buying a home is an exciting and confusing process. Once the loan is secured, it's important to know who gets the payment: ... Read Answer >>
  5. What is the difference between a PMI (primary mortgage insurance) loan and a Federal ...

    Understand the difference between a conventional mortgage that requires primary mortgage insurance and a Federal Housing ... Read Answer >>
  6. Is the interest on a home equity line of credit (HELOC) tax deductible?

    Learn the advantages of using a home equity line of credit, and find out how these low-rate loans also qualify for a tax ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center