Home Equity Loan or HELOC vs. Reverse Mortgage: How to Choose - Credible News

A reverse mortgage does not require you to make loan payments while you’re alive, but HELOCs and home equity loans do.
Amy Fontinelle

Amy Fontinelle is a mortgage and credit card authority and a contributor to Credible. Her work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.

Read more” > Amy Fontinelle Edited by <a href="https://www.credible.com/blog/author/cjennings/" class="entry-meta__tooltip" data-tooltipjs="" data-tooltipjs-hover="true" data-tooltipjs-placement="top" data-tooltipjs-close-on-outside-click="true" data-tooltipjs-title="Credible’s editing process includes rigorous fact-checking by experts to ensure that all content is accurate and up-to-date. This article has been reviewed, edited, and fact-checked by Chris Jennings. As a Credible authority on mortgages, Chris covers topics including home loans and mortgage refinancing. His work has appeared in Fox Business and GOBankingRates.Read more” > Chris Jennings Updated September 2, 2021
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If you’re a homeowner and 62 or older, you might be weighing your options to access your home’s equity. A reverse mortgage, home equity loan, or home equity line of credit (HELOC) could provide the cash you need for living expenses, home improvements and repairs, medical bills, or almost any other purpose.
A reverse mortgage does not require you to make loan payments while you’re alive; HELOCs and home equity loans do. But repayment is only one of several factors to consider if you’re contemplating these mortgage products.
Find out how each option works to determine which one best suits your needs:

Home equity loans and HELOCs are both second mortgages. With either loan, you can borrow money based on how much equity you have in your home. You’ll repay the money in monthly installments.
Since these loans are secured by your home, they have relatively low interest rates. However, second mortgages are considered riskier for lenders than first mortgages.
As a result, you can expect HELOC and home equity rates to be one or two percentage points higher than current mortgage rates.
You’ll also need to have a good chunk of home equity — most lenders will want you to have at least 15% equity in your home.
Home equity loans allow you to borrow against the value of your home and receive a lump sum at a fixed interest rate. You can repay the money over a term as long as 30 years.
You’ll have to start repaying both principal and interest within about a month of getting your loan proceeds.
HELOCs allow you to borrow any amount up to an established credit limit. Instead of borrowing the money all at once, you can borrow smaller sums as you need them. In this way, HELOCs are similar to credit cards.
Unlike a credit card, though, which allows you to borrow and repay money indefinitely, a HELOC limits borrowing to a specific draw period — generally between five to 10 years.
Many lenders don’t require borrowers to repay any principal during the draw period; instead, they only ask that you pay interest on what you’ve borrowed.
A reverse mortgage gives you cash to spend however you want. If you still owe money on your first mortgage, you’ll have to use the reverse mortgage proceeds to pay it off, and the remaining proceeds are yours.
However, it’s not a second mortgage, and it doesn’t require you to make monthly payments.
The amount you can borrow will be higher depending on:
A reverse mortgage’s loan balance grows over time but isn’t due until you die or permanently move out of your home. Usually, the lender gets repaid by selling the home. Alternatively, the owner’s heirs can repay the loan and keep the home.
You must meet these qualifications to be eligible for a HECM reverse mortgage:

The main benefits of home equity loans and HELOCs are their relatively low interest rates and the opportunity to borrow lots of money, while the main drawback is that these loans are secured by your home, potentially increasing your risk of foreclosure.
Read more: Fixed-Rate HELOCs: A Cross Between HELOCs and Home Equity Loans
A reverse mortgage loan allows seniors to access their home’s value even if they can’t afford monthly payments or qualify for other types of loans, but it comes with considerable costs.
See: Reverse Mortgage Alternatives: 5 Options for Seniors
If you can meet a lender’s income and credit requirements, reverse mortgage alternatives like a home equity loan or HELOC will probably be better options. These loans have much lower upfront costs and are easier to understand than reverse mortgages.
Home Equity Loan or HELOC vs. Reverse Mortgage infographic
Older homeowners might be interested in cash-out refinancing as an alternative means of tapping home equity.
With a cash-out refinance, you take out a new first mortgage that’s larger than the balance on your existing mortgage. The proceeds from your new loan pay off your existing mortgage and your closing costs. You then get to keep the rest of the money to use however you want.
A cash-out refinance can be a good option when prevailing mortgage rates are lower than the rate you’re currently paying, you have good credit, and you’re capable of affording the new monthly mortgage payments.
Credible can help you get started with your cash-out refinance. Checking refinance rates on our platform is simple and only takes a few minutes — and it won’t impact your credit score.
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Amy Fontinelle is a mortgage and credit card authority and a contributor to Credible. Her work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.
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