Can You Deduct Home Equity Loan Interest?

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For many homeowners, one of the biggest selling points of a home equity loan or line of credit (HELOC) is the potential tax benefit. But those benefits are not automatic. Whether you can deduct the interest depends on how you use the loan, when you borrowed it, and whether you itemize your deductions instead of taking the standard deduction.

The rules changed dramatically with the 2017 Tax Cuts and Jobs Act (TCJA), and the latest tax bill signed into law in July 2025 has made those changes permanent. Before 2017, homeowners could deduct the interest on home equity loans regardless of how the money was spent — whether for home renovations, vacations, or paying down credit card balances. Now, the rules are much stricter: the loan must be used to buy, build, or substantially improve the property that secures the loan.

In other words, you can’t deduct the interest on a home equity loan used for debt consolidation, tuition, or travel. You also can’t use a loan secured by your primary residence to renovate a vacation home and still claim the deduction. The IRS requires a direct connection between the funds borrowed and the property itself.

The amount you can deduct also depends on when the loan originated. For loans taken after December 15, 2017, interest is deductible on combined mortgage and home equity debt up to $750,000 for joint filers or $375,000 for single filers. If the loan was taken before that date, the higher limits of $1 million for joint filers and $500,000 for singles still apply. Importantly, these limits include your first mortgage balance as well as your home equity loan. So if you already owe $700,000 on a mortgage, only $50,000 of home equity debt would qualify for interest deductions under the $750,000 cap.

To illustrate, consider two scenarios. If you borrowed $200,000 in 2022 and split it between paying off credit cards and building a new home office, only the portion spent on the renovation would qualify. Or suppose you had a $700,000 mortgage balance in 2025 and then took out a $100,000 HELOC to update your kitchen. Because the combined debt is $800,000 — above the $750,000 cap — only part of the HELOC interest would be deductible.

Even if your loan qualifies, you can only take advantage of this tax break if you itemize deductions on your return. That means your combined deductions — mortgage and home equity interest, charitable contributions, medical expenses, and others — must exceed the standard deduction. With the standard deduction now set at $31,500 for joint filers in 2025, many households will find it makes more sense to take the standard deduction rather than itemize just for home loan interest.

For those who do qualify, good record-keeping is essential. You’ll need Form 1098 from your lender showing interest paid, plus documentation proving how the loan proceeds were used. Receipts, invoices, and permits for major home projects should all be kept in case the IRS ever asks for verification.

The bottom line: a home equity loan can still carry tax benefits, but only under specific conditions. The interest is deductible if — and only if — the funds are used to substantially improve the property that secures the loan, and if itemizing deductions gives you a bigger benefit than the standard deduction. For many homeowners, the deduction won’t apply, but for those undertaking major renovations, it could provide a valuable way to offset costs.

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Why a Reverse Mortgage Could Be a Smart Move for Seniors in July 2025

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A reverse mortgage isn’t an option for every homeowner. Eligibility typically begins at age 62, which makes it a solution primarily available to older Americans who have built up significant equity in their homes. But for those who do qualify, a reverse mortgage can be a powerful tool — and in today’s economic environment, it may make more sense than ever.

Unlike a traditional mortgage or home equity loan, a reverse mortgage allows homeowners to tap into their equity without making monthly repayments. Instead, the lender provides funds — either as a lump sum, a line of credit, or steady monthly payments — and repayment isn’t due until the homeowner sells the property, moves out permanently, or passes away. This arrangement can transform home equity into an immediate financial cushion, providing extra breathing room in retirement budgets.

While reverse mortgages have long offered benefits for retirees, there are several reasons why they are particularly timely in July 2025.

Filling the gaps left by Social Security

Concerns over Social Security’s stability are weighing heavily on many retirees. Between reports of overpayments, clawbacks, and ongoing fears about the program’s long-term funding, relying solely on Social Security can feel uncertain. With the average monthly benefit under $2,000, many seniors already struggle to cover basic expenses. A reverse mortgage can help bridge the shortfall by creating a second income stream. This extra monthly support can make it easier to pay rising grocery, utility, and healthcare bills — especially as inflation began ticking upward again in June and borrowing costs remain high.

No repayments required in a high-rate environment

One of the biggest advantages of a reverse mortgage is that it doesn’t require immediate repayment. In today’s climate of elevated interest rates, this feature is particularly attractive. Borrowers don’t need to worry about budgeting for monthly payments as they would with a home equity loan or HELOC. Instead, repayment is deferred until the home is sold or the estate is settled. For seniors concerned about cash flow, this eliminates the stress of juggling another monthly bill.

Easier qualification compared to other financing options

The average American homeowner now holds more than $300,000 in home equity. Seniors who own their homes outright may have even more. This means qualifying for a reverse mortgage can be simpler than trying to secure alternative funding sources such as large personal loans or credit lines. Lenders primarily look at the value of the home, making it a straightforward process compared to navigating stricter credit or income requirements for other types of borrowing. In a time of financial uncertainty — with market volatility, persistent inflation, and elevated living costs — easy access to funds can make a meaningful difference.

A reverse mortgage is not a universal solution, but for many seniors, it offers a way to unlock the value of their home without taking on the burden of new monthly payments. In the economic climate of July 2025, it can help offset the limitations of Social Security, sidestep the challenges of high interest rates, and provide easier access to funds than many alternatives. For retirees seeking greater stability and flexibility, this option may be worth a closer look.

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How Mortgage Forbearance Shapes the Housing Market and Buyer Confidence

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Mortgage forbearance can have a powerful effect on the housing market, influencing everything from property values and inventory to buyer behavior and local confidence. While the term forbearance often suggests financial distress, it is not always a sign of market instability. In fact, as demonstrated during the COVID-19 pandemic, widespread forbearance programs helped stabilize the housing market by preventing a flood of foreclosures and allowing most homeowners to stay in their homes.

A key example came in late 2020 when researchers estimated that mortgage forbearance programs helped about 500,000 borrowers avoid foreclosure in just the fourth quarter of that year. By delaying mortgage payments without triggering defaults, forbearance protected both individual homeowners and broader market conditions.

For sellers, being in forbearance introduces both opportunity and complexity. If a homeowner’s financial struggles continue, selling the property might be a practical way to pay off the mortgage and avoid foreclosure—especially if home values have increased and equity has grown. Still, sellers in forbearance must understand what they owe, including any accrued interest or fees, and should work closely with their real estate agent and mortgage servicer to navigate the process. If the home is worth less than the remaining balance, options like a short sale or deed in lieu of foreclosure may be required.

Selling while in forbearance can also raise concerns among buyers. Some buyers might worry that financial hardship led to deferred maintenance or may question the overall stability of the neighborhood if forbearance is widespread in the area. However, a knowledgeable agent can help ease those concerns by providing market data, encouraging a thorough home inspection, and explaining the seller’s situation honestly and clearly.

Forbearance can also influence local home pricing and inventory. According to a Federal Reserve study, the availability of forbearance programs during the pandemic likely contributed to a 0.6 percentage point increase in home prices between April and August 2020. By reducing the number of homes forced onto the market due to foreclosure, forbearance helped support prices during a volatile economic time. It also allowed more people to stay employed and housed, which in turn helped keep inventory low and demand strong.

Foreclosure is always a risk when homeowners are in forbearance, particularly if the underlying financial hardship is long-term. But most forbearance cases do not end in foreclosure. Instead, many borrowers resume payments or work out new arrangements with their lenders, such as loan modifications or deferment plans. This reality helped prevent a repeat of the 2008 housing crash, when a lack of available relief options led to widespread defaults and collapsing home values.

Still, buyer confidence can waver if forbearance levels are elevated in a particular region. A spike in forbearance may reflect deeper economic issues such as high unemployment, a recent disaster, or regional instability. Buyers might respond by submitting lower offers or avoiding certain areas altogether. That said, with transparent communication and updated market insights, real estate agents can guide buyers through their concerns and help them assess property value and long-term potential.

For real estate professionals, navigating transactions involving forbearance requires strong collaboration with mortgage servicers and clear communication with clients. Agents should never offer financial advice regarding forbearance or mortgage terms but can point clients to helpful resources such as Freddie Mac, Fannie Mae, the FHA, the VA, and HUD-approved housing counselors.

Ultimately, mortgage forbearance serves as a vital buffer during times of crisis. Data from the National Bureau of Economic Research shows that 94% of mortgage defaults stem from sudden income loss. During the COVID-19 downturn, forbearance gave struggling homeowners a chance to recover and remain housed. Studies by JPMorgan Chase confirm that most borrowers successfully exited forbearance and resumed payments, avoiding foreclosure and preventing further damage to the market.

The long-term success of forbearance depends on how well homeowners can transition once their pause period ends. Exit options such as repayment plans, loan modifications, or deferrals must match the borrower’s financial reality. When they do, forbearance becomes more than a stopgap—it becomes a safeguard for families, communities, and the housing economy as a whole.

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Mortgage Rates May Finally Fall—But a Housing Revival Depends on More Than Just Numbers

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When mortgage rates spiked in 2022, jumping from around 3.5% to nearly 7%, it brought the COVID-era housing frenzy to a grinding halt. That sharp rise in borrowing costs priced many buyers out of the market and discouraged existing homeowners—many locked into historically low rates—from listing their homes. The result: a frozen housing market with limited inventory, stagnating sales, and strained affordability.

Economists had originally forecast a drop in mortgage rates by early 2025, but those hopes were tempered by persistent inflation and economic volatility. Despite three interest rate cuts from the Federal Reserve in late 2024, average mortgage rates have stayed above 6.5%. Still, analysts are cautiously optimistic that a turning point is coming. Morgan Stanley projects a gradual but steady decline in mortgage rates through 2026, driven primarily by falling treasury yields.

Mortgage rates are closely tied not just to the federal funds rate but to the 10-year treasury yield, which acts as a benchmark for lenders when pricing mortgage-backed securities. Lower yields often signal investor concern about economic conditions—when the economy weakens or uncertainty rises, demand for safer investments like government bonds pushes yields down. In turn, this drop can translate into lower mortgage rates.

Secretary of the Treasury Scott Bessent has announced the Trump Administration’s intention to bring down treasury yields as part of a broader strategy to provide relief for homebuyers. If successful, and if treasury yields fall as Morgan Stanley expects, mortgage rates could follow suit—potentially reviving a sluggish housing market.

However, there’s a catch. Lower mortgage rates that result from economic downturns don’t always lead to a housing boom. In fact, when consumer confidence is low and job security is shaky, people may be less likely to make major financial commitments, like purchasing a home. So while falling rates may open the door for some, broader economic stability will still be key to fueling meaningful housing activity.

That said, if mortgage rates can decline without the U.S. sliding into a deep recession, the impact on the economy could be significant. The National Association of Home Builders reported a boost in buyer confidence and increased housing activity following rate drops earlier in 2025. Morgan Stanley’s economists agree, pointing out that housing doesn’t just feed into GDP through construction—it also stimulates consumer spending. Homebuyers often spend more on furniture, appliances, and renovations after a purchase, creating a ripple effect throughout the economy.

Heather Berger, an economist at Morgan Stanley, emphasized this point: “Housing flows into gross domestic product (GDP) not only through residential investment, but also through the impacts on consumption. Households spend more on durable goods following home purchases.” That kind of economic multiplier effect could be especially important now, as the U.S. confronts the fallout from new reciprocal tariffs and slowing global trade.

In Q1 of 2025, U.S. real GDP slipped by 0.3%, largely due to reduced imports following trade actions from the Trump Administration. With global markets uncertain and trade tensions rising, domestic growth may increasingly depend on strong consumer sectors—like housing. If mortgage rates decline and home sales rebound, the housing market could play a crucial role in stabilizing and even jump-starting the broader economy.

While it remains to be seen whether rates will fall far or fast enough to spark a full-blown housing revival, the outlook for buyers may be brightening. For now, patience—and preparation—could be key for those waiting on the sidelines.

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Smarter Ways for Seniors to Tap Home Equity

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For older homeowners in need of extra cash, a reverse mortgage can seem like an easy solution. There’s no minimum credit score required, and as long as you stay current with your insurance, home maintenance, and property taxes, you don’t have to make any payments until you move out, sell your home, or pass away. However, this option comes with strict qualifications. To get a government-backed home equity conversion mortgage (HECM), the most common type of reverse mortgage, you must be at least 62 years old and have at least 50% equity in your home.

There are serious risks too. Once you no longer live in the home or if you fall behind on maintenance or taxes, the entire loan and accumulated interest become due immediately. That can leave your heirs scrambling to resolve the debt, sell the home quickly, or even face foreclosure. Before you commit to a reverse mortgage, it’s worth exploring safer or more flexible alternatives.

A home equity line of credit, or HELOC, allows you to borrow against your home’s value much like a reverse mortgage, but without the age restriction. It functions as a revolving line of credit, meaning you can withdraw money as needed over a draw period, usually ten years. During that time, you only pay interest on what you borrow. After the draw period ends, you begin repaying the principal and interest over a fixed term, often 20 years. If you use the funds for home improvements, some of the interest may be tax-deductible. This option generally requires a credit score of 620 or higher and at least 15–20% equity in the home.

A home equity loan is another option that gives you a lump sum up front, which you repay in fixed monthly payments over a term of five to thirty years. Like HELOCs, these loans require a decent credit score and a moderate amount of equity in your home. The main difference is that you get all the funds at once, which might make sense for large, one-time expenses like paying off debt or funding a major renovation. The interest may also be partially tax-deductible if used for home improvement.

For those needing a larger cash payout, a cash-out refinance might be the right move. This replaces your existing mortgage with a new, larger loan and pays you the difference in cash. You’ll still make monthly payments, but now on a higher balance. For example, if your home is worth $400,000 and you owe $100,000, you could refinance into a loan for $320,000, using the extra $220,000 however you choose. This strategy works best when you can secure a low interest rate and want to extend your loan term. Like the previous options, you’ll need decent credit and enough equity to qualify.

Another increasingly popular method is home equity sharing. Instead of borrowing money, you sell a percentage of your home’s future value to an investor in exchange for a cash payment now. When you sell your home or reach the end of the contract term, you repay the investor based on the home’s value at that time. These agreements are more flexible than traditional loans and often available to homeowners with lower credit scores. They require less income documentation and no monthly payments, though you are effectively giving up part of your future home appreciation.

Finally, if you’re open to a lifestyle change, downsizing could be the simplest and most financially effective solution. With home equity averaging more than $300,000 nationally, selling your current home and moving to a smaller or less expensive property could free up significant cash. You might also benefit from reduced living expenses, including lower property taxes, insurance premiums, and maintenance costs, especially if you relocate to a more affordable area.

Reverse mortgages may seem attractive at first glance, but they come with strings attached. Whether it’s a HELOC, a home equity loan, refinancing, equity sharing, or simply downsizing, there are multiple ways for older homeowners to access their home’s value with more flexibility and fewer long-term risks.

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