Reverse Mortgage vs. Home Equity Loan or HELOC: Which Should You Choose?
If you’re at least 62 years old and interested in tapping your home equity, you have an option younger borrowers don’t – a reverse mortgage. But how should you decide between a reverse mortgage and other popular loans secured by your equity, like home equity loans and home equity lines of credit (HELOCs)? All three let you access cash that can be used for any purpose, from making home improvements to covering everyday expenses.
Below, we’ll take you through an in-depth comparison of our contenders: reverse mortgage versus home equity loan versus HELOC. The best choice for you depends on your financial goals, credit profile, income and how long you plan to stay in your home.
Overview: Reverse mortgage vs. home equity loan vs. HELOC
| Reverse mortgage (HECM)* | Home equity loan | HELOC | |
|---|---|---|---|
| Age requirement | 62 or older | None | None |
| How you receive the funds | Monthly payouts, a lump sum or credit line | One lump sum | Use the funds as needed by swiping a card |
| Monthly payment | No monthly payment required | Fixed monthly payments | Monthly payments vary based on the credit line’s outstanding balance and variable interest rate |
| Interest rate type | Fixed or variable, depending on payout option | Fixed | Variable |
| Minimum credit score | No minimum credit score | 620 | 620 |
*Throughout this article, we’ll treat home equity conversion mortgages (HECMs) as the standard for reverse mortgages. Backed by the Federal Housing Administration (FHA), HECMs are the most common type of reverse mortgages.
Reverse mortgage
What it is: A reverse mortgage is a unique type of home equity product available to homeowners ages 62 or older who own their home outright, or have a fairly low mortgage balance. Instead of making monthly payments to a lender as with a traditional mortgage, reverse mortgage borrowers receive payouts secured by their home equity.
How it works: Borrowers don’t have to repay the loan as long as they live in the home. During this time, interest and fees are accumulating and adding to the loan balance. The loan comes due when the borrower no longer lives in the home, sells it or dies. In most cases, the borrower — or their heirs — sell the property to pay off the loan. This complex loan type can have a steep learning curve, but it’s crucial to make sure you fully understand the pros and cons of a reverse mortgage before signing on the dotted line.
Costs and fees: Up to $6,000 in lender fees may be required at closing, in addition to 2% of the loan amount for upfront mortgage insurance fees. Ongoing fees include servicing fees and 0.5% of the loan amount in annual mortgage insurance premiums.
Find out more about the many rules that come with a reverse mortgage.
Reverse mortgages come with higher costs and fees
Reverse mortgages are typically more expensive than home equity loans and HELOCs. If you’re interested in a reverse mortgage because of its unique perks, then the fees and costs that come with it may be worth it for you — but if you just want to access your home equity, you may find a cheaper way.
Home equity loan
What it is: A home equity loan is another option for borrowing against home equity. Borrowers take out a lump sum secured by their home equity, and repay the loan in fixed monthly installments over a set term.
How it works: To qualify for a home equity loan, borrowers must have enough equity in their house to cover the loan’s payout while still maintaining 85% equity. Typically, home equity loan rates are fixed and loan terms range from five to 30 years.
Costs and fees: 2% to 5% of the loan amount in closing costs, but typically no ongoing fees.
What is a second mortgage?
Home equity loans are sometimes called second mortgages because they’re secured by your home and, in many cases, borrowers take them out while still repaying a primary home loan. In the event of foreclosure, a second mortgage is second in line to be repaid, behind that primary home loan. This makes them slightly more risky for lenders and, as a result, slightly more expensive for borrowers.
Home equity line of credit
What it is: A HELOC is similar to a home equity loan in that it’s also a second mortgage, and borrowers can use HELOC funds for any purpose. Because they’re so similar, HELOCs and home equity loans typically come with the same credit, debt-to-income (DTI) ratio and loan-to-value (LTV) ratio requirements.
How it works: A HELOC allows the borrower to use the loan proceeds as needed — much like they would a credit card — during a set time frame, called the “draw period.” During this time, which typically lasts 10 years, borrowers can usually make low, interest-only payments. However, once the draw period ends they’ll enter the repayment period. This is when payments can shoot up hastily, since borrowers must begin making full principal-and-interest payments at a variable interest rate. The repayment period typically lasts between 15 and 20 years.
Costs and fees: You can expect to pay 2% to 5% of the loan amount in closing costs. Many lenders also charge an annual fee and transaction fees.
What to consider when comparing reverse mortgages, home equity loans and HELOCs
Your age
Besides determining which loan options are available to you, your age will also affect the amount you can borrow. Generally, with a reverse mortgage, the older you are, the more money you can access — taking the loan out too early could mean running out of money later.
The amount available to you
You can use a home equity loan and HELOC calculator to find out how much you can access with a HELOC or home equity loan, and then compare that to how much you can get with a reverse mortgage. The most anyone can borrow with a HECM in 2024 is $1,149,825, but that doesn’t necessarily mean you can borrow that much — the limit that applies to you depends on your age and home value.
Timeline
How quickly do you need the funds? If you’re looking for the fastest closing possible, a HELOC is going to be your best bet and can close in as little as five days. A home equity loan likely won’t take much longer, but a reverse mortgage will — usually around a month or more.
Impact on your spouse
Be sure to consider the implications of a reverse mortgage for your spouse, who likely wants to remain in the home if you die first. With an HECM, an eligible non-borrowing spouse may be able to live in the home after you die or move out, provided they keep up with insurance, taxes and maintenance. However, they won’t continue to receive reverse loan payments — if you’d like that to be an option, you’ll have to make them a co-borrower. The effects of your death on someone who lives with you, but isn’t your spouse or heir, are different: they will most likely have to move out.
Loan costs
You’ll want to compare the upfront and ongoing fees of each option. For example, any loan may have an origination fee, closing costs and interest charges. But reverse mortgages also have an upfront mortgage insurance premium (UFMIP) and ongoing mortgage insurance and service fees. Meanwhile, HELOCs may have transaction fees, annual fees or even inactivity fees that kick in if you don’t use enough of your credit, or don’t use it often enough.
How to avoid excessive mortgage costs and fees
Here are some steps you can take to avoid paying more than you should when taking out a home loan:
- Speak with a housing counselor. A counselor can help you understand your options and what to expect. Your best bet is a counselor approved by the U.S. Department of Housing and Urban Development (HUD) — you can search for one online. Avoid a counselor affiliated with a lender.
- Gather loan estimates from three to five lenders. You can use a loan comparison site to submit your information to multiple lenders at the same time.
- Compare your offers. Make sure you’re looking at the APR and interest rate — both will be listed in your loan offer. The APR is a great way to compare loans, since it will capture all of the costs and fees, including interest.
Tax benefits
How you plan to use the proceeds of an equity-based loan can help determine which loan type is best for you. For instance, the mortgage interest will be tax-deductible if you use a home equity loan or HELOC for home improvements, but that’s not the case with a reverse mortgage.
Which option is best for me?
A reverse mortgage is best if:
- You’re at least 62 years old and own your home outright or have significant equity. A reverse mortgage is only an option if you’re 62 or older and have a low mortgage balance.
- You’re looking for a long-term or ongoing income source. With flexible payout options, a HECM can provide continuous income.
- You’re looking to supplement your income but don’t want payments. You can tap into your home equity through a reverse mortgage without monthly payments.
- You don’t plan to pass your home to heirs, or they’re able to buy or sell your home. In many cases, homeowners (or their heirs) sell the home to satisfy a reverse mortgage when it’s due. If you aren’t planning to include your home in your estate, a reverse mortgage may work for you.
- You’re looking to age in place. A reverse mortgage can provide a way for you to remain in your home and maintain your lifestyle as you get older.
- You understand the loan costs and fees. HECMs are the most expensive home loan on the market. The fees and costs may well be worth it, especially if your goal is to remain in your home as you age, but make sure you go into that trade-off with your eyes open.
A home equity loan is best if:
- You’re under 62 or don’t have enough equity for a reverse mortgage. If you don’t qualify for a reverse mortgage, a home equity loan can provide access to your equity.
- You need funds over a short time period, not continuously. A home equity loan may work if you’re looking to access the full loan amount now, rather than looking for an ongoing income source.
- You have a stable income and can afford the payments. A home equity loan may be a good option if you have reliable income that can support a second mortgage payment.
- You’re accessing your equity for home improvement and want the tax benefit. The interest you pay on a home equity loan or HELOC is tax-deductible when using the loan proceeds for home improvement.
A HELOC is best if:
- You’re under 62 and want access to home equity. As with a home equity loan, a HELOC can turn your home equity into cash if you don’t qualify for a reverse mortgage.
- You want to access the funds as needed. You can tap into your equity as needed — as well as pay back and then reuse the credit line — as many times as you’d like during the draw period. A HELOC may have fewer fees, since you won’t have to close on a new loan if you want to borrow more — you just pay off and reuse the funds.
- You can handle variable payments. Unlike a home equity loan, HELOC payments change based on how much you borrow and market fluctuations.
- You don’t plan to remain in your home. If you know you won’t be in your home long term, a HELOC will be a better option than a reverse mortgage.
- You have a high credit score. Your credit score will help determine your home equity loan or HELOC interest rate. You stand to get a competitive rate if you have a good credit score.
Frequently asked questions
The most common type of reverse mortgage is the home equity conversion mortgage (HECM), insured by the federal government. Other reverse mortgage types include single-purpose reverse mortgages — smaller loans for home improvement or other specified uses — and proprietary reverse mortgages — loans financed by private lenders.
Typically, no, you don’t have to pay taxes on the money you receive from a reverse mortgage.
No, a reverse mortgage shouldn’t affect your Social Security or Medicare benefits. But if you’re unsure about how a new loan might affect other benefits you receive, it’s best to talk to a housing counselor or reach out to the agency administering those benefits.