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. Credit & Loans

    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. 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.
  4. Products and Investments

    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. Home & Auto

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  6. 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, ...
  7. 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.
  8. Retirement

    Additional Streams of Income for Seniors

    Find out how a reverse mortgage can work in your favor during retirement.
  9. Home & Auto

    When (And When Not) To Refinance Your Mortgage

    There are both good and bad reasons to refinance. Learn more about both here.
  10. Credit & Loans

    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.
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. Is it a good idea to add a reverse mortgage to your retirement strategy?

    A reverse mortgage can be a great way to increase retirement income. Does it work for everyone? What happens after a homeowner ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. What are the best ways to pay off my mortgage quickly?

    Learn how mortgage payments may be reduced and how to save thousands on mortgage loans by lowering the interest and principle ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center