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. Investing

    Using Home Equity Loans For Debt Consolidation

    A home equity loan or line of credit is a convenient way to consolidate debts, cut your interest rate and gain a tax deduction. But there are big risks.
  2. 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.
  3. Retirement

    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.
  4. Financial Advisor

    Reverse Mortgages: Right for Clients? Not Often

    Reverse mortgages are a legitimate vehicle for folks age 62 and up to tap into the equity in their homes for other uses. Here's what to consider with them.
  5. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  6. Retirement

    Additional Streams of Income for Seniors

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

    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 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
  9. 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.
  10. Retirement

    The Reverse Mortgage: A Retirement Tool

    Discover another way to fund your retirement without having to make payments on a loan.
Trading Center