Reverse Mortgage vs. HELOC

For most people, a home can be a huge asset. Whether it’s tapping into your equity for extra funds or passing it onto the next generation, it is vital to take care of your home and ensure its financing stays on track.

You may have heard that a reverse mortgage is a good option for older homeowners looking to supplement their retirement or significantly reduce monthly payments. But it’s important that you have all of the facts and know what your home equity options are before signing that dotted line.

What is a reverse mortgage?

A reverse mortgage is a type of loan that enables older homeowners to borrow funds against a portion of the equity in their home. Differing from a traditional mortgage where you make payments to your lender, with a reverse mortgage — the lender makes a payment to you. The loan pays off your existing mortgage if you have one, and the remaining funds can be used at your discretion.

However, it’s your responsibility to continue paying for your property taxes, homeowners insurance, and maintenance of the house. Reverse mortgage loans are typically designed for homeowners who are 62 or older, have retired, and are looking to end their monthly mortgage payments.

Reverse mortgage requirements

You may be thinking a reverse mortgage is an easy way to get some free funding in your pocket, but that isn’t the case. These types of loans require that you borrow against your property’s equity (the difference between what you currently owe on your mortgage and the current value of the home). Once your lender orders an appraisal of the home, they’ll determine how much money you can receive.

Not everyone is eligible to use this type of loan. Here are a few of the requirements you must meet:

• At least 62 years of age
• Must be your primary residence (not a second residence or vacation home)
• Can’t owe federal debt, including student loans or income tax
• House/real estate must meet the required property standards
• If you plan to take out a home equity conversion mortgage (HECM), you’re required to attend reverse mortgage counseling and undergo a financial assessment by the U.S. Department of Housing and Urban Development

Pros and cons of a reverse mortgage

If you meet the requirements to take out a reverse mortgage, there are advantages and disadvantages that you need to be aware of. For those struggling to make mortgage payments or pay other bills, a reverse mortgage can provide enough financial relief for you to afford to stay in your home. (Though it won’t entirely eliminate financial obligations, such as property taxes and homeowners insurance.) They can also help ensure that your spouse is able to remain in the home rather than selling it if you pass away.

As with other traditional mortgages, there are drawbacks to taking out a reverse mortgage. For example, your equity will decrease significantly, and you’ll make less profit if you decide to sell down the line. Unlike other loans, your reverse mortgage will also increase as time goes on, increasing your loan balance. This can be counterbalanced if you decide to cover the interest charged by the lender.

What is a HELOC?

Another loan that can help you tap into your home’s equity for funds is a home equity line of credit (HELOC). Rather than receiving money in one lump sum, you’ll open a revolving line of credit based on the property’s equity, minus what you still owe on your mortgage. This means you can use as much or as little of the total amount of the borrowing limit during the draw period.

Pros and cons of a HELOC

A typical draw period for a HELOC is ten years, during which you are only required to make interest payments. Once you enter the repayment period, you’ll pay the interest compounded on the amount you withdraw (not the total equity available). HELOCs also offer variable and fixed interest rates, depending on your lender. The great thing about a HELOC, is that it’s a line of credit you can draw funds from as you need them. Rather than receiving a lump sum, you can take out as much or as little as you need. Then you are only required to pay interest on what you withdraw, rather than the maximum amount available.

However, it’s important to note that if you opt for a variable-interest rate or if your lender does not offer fixed-rate HELOC options, then rising interest rates may increase your payments. Many borrowers are also caught off guard when their monthly payments increase during the repayment period. It’s important to calculate and adhere to a budget so you don’t risk tapping into more equity than you’re able to pay off.

HELOC or reverse mortgage: which is right for me?

It’s always best to consult with a trusted mortgage lender before choosing as not all lenders offer these products. They’ll be able to offer you a list of your options and outline which will be most beneficial for your needs.

If you’re interested in using the equity in your home for home improvement projects or renovations, then a HELOC may be the right option for you. You’ll be in control of how much of your credit line you utilize and only pay back interest on the amount you withdraw.

Reverse mortgages are only available to homeowners at least 62 years old, and though you can eliminate your monthly mortgage payments, the loan will continue to accrue interest. This may result in a higher balance than you started with on your first mortgage.

Always do your research

Regardless of which type of loan you’re interested in, it’s always important to do your research and speak with a trusted lender so you can better understand all of your options. Reverse mortgages can seem like a great choice on a surface level, but these loans can be expensive, and its disadvantages may fall on family members to pay back or lose the property. When it comes to tapping into your home’s equity, a HELOC offers a way to get your funds as you need them.

At the end of the day, the loan that will work best for you depends on your unique situation. Be sure to do your research so you know all of your options.