You want to tap into your equity. But which loan option is better — reverse mortgage or home equity line of credit (HELOC) — depends on your age, borrowing needs and financial goals. Know how each option works and what to look out for.
Reverse mortgages vs. HELOCs
Reverse mortgages and HELOCs are completely different types of loans that both allow you to tap into your home’s equity. Besides that, there isn’t much overlap between them.
Here’s a quick rundown of the differences.
Reverse mortgage
HELOC
Age minimum
You must be 62 or older.
No age minimum.
How it works
Reverse mortgages pay you, instead of you having to pay your mortgage every month.
The loan only becomes due when the homeowner dies or moves out of the home.
HELOC is a revolving line of credit that has two parts:
A draw period where you take out money, typically 10 years
A repayment period where you pay the loan back, typically 20 years
How it affects your equity
Reverse mortgages eat into your home’s equity, reducing the amount of equity with each payment you receive.
While you draw on the HELOC, you effectively reduce the equity in your home, but you must pay it back.
Types of loans
Multiple types:
Term reverse mortgage
Tenure reverse mortgage
Home Equity Conversion Mortgage (HECM) for purchase loan
Lump-sum payout
Jumbo reverse mortgage
Growing line of credit
Revolving line of credit
Loan limits
Borrow up to $822,375 for HECMs.
Borrow up to 85% of your home’s value, minus the amount owed on your mortgage.
Interest rates
Fixed or variable
Typically variable, though many lenders let you fix all or a portion of your line.
Fees
Vary by lender
May include origination fee, various closing costs, counseling fees, etc.
Beware of hidden costs and fees.
Vary by lender
May include application fee, closing costs, annual fees and early payoff fees.
Risk level
High
You could lose your home if you don’t continue paying your homeowner’s insurance and taxes.
Medium
If you can’t afford your regular mortgage payment plus HELOC payment, you may risk foreclosure.
Choose a reverse mortgage only if you’re 62 or older
Reverse mortgages are only available to people 62 and older who want to get rid of their mortgage payments during retirement.
They’re best for people who:
Want to supplement their retirement income.
Don’t plan on bequeathing the home or don’t have heirs.
Understand the potential pitfalls and risks.
While there’s no specific income requirement to qualify for a reverse mortgage, you must show you can meet your home’s financial responsibilities, like paying your property taxes and homeowner’s insurance on time.
Avoid this loan type if you:
Want your heirs to inherit the home.
Have a surviving spouse that’s not named as a borrower on the loan.
Don’t think you can keep with your home’s financial obligations.
As soon as the borrower of a reverse mortgage dies or moves out, the loan matures and the outstanding debt is due. The bank generally pays off the loan by selling the property. If your heirs want to keep the house, they’ll need to pay the loan.
A note about reverse mortgages: Because you could lose your home under specific conditions with a reverse mortgage, you must be willing to undergo reverse mortgage counseling with an agency to qualify. It’s also a smart idea to have a lawyer review your contract to identify any hidden risks and clauses that could cause you to lose your home.
Choose a HELOC if you want a revolving credit line
HELOCs are ideal for people of any age who want a revolving line of credit to tap into when they need it. With a HELOC, you can take out as much or little as you want for a set period — although lenders impose minimum and maximum lending limits on HELOCs.
They’re best for people who:
Need an ongoing cash source.
Are looking for a lower interest rate than a personal loan or don’t want to pay the costs associated with a cash-out refinance.
Have at least 15% equity in their home and a FICO score of at least 680. The better your credit score, the lower the rate you can receive.
Want rate discounts and don’t mind opening additional financial products with the lender to get them.
Avoid this loan type if you:
Prefer a lump sum loan with predictable fixed-interest payments.
Don’t want to pay the fees associated with opening and maintaining a HELOC.
Want to pay off the loan within three years. Most lenders charge a prepayment penalty if you pay off the HELOC too early.
Compare interest rates for home equity loans, HELOCs and cash-out refinancing
Use our tool to get personalized estimated rates from top lenders based on your location and financial details. Select whether you’re looking for a Home Equity Loan, HELOC or Cash-Out Refinance.
If you selected a home equity loan or HELOC, enter your ZIP code, credit score and information about your current home to see your personalized rates.
In the Cash-Out Refinance tab, select Refinance and enter your ZIP code, credit score and other property details to see what you might qualify for.
Bottom line
Reverse mortgages are best for seniors interested in supplementing their retirement income and don’t plan on bequeathing the home. HELOCs are better for short-term borrowing up to 10 years to access cash when you need it. Compare mortgages to find the best option to leverage your home’s equity.
Kelly Larson is a Senior Editor at MarketWatch and formerly an editor at Finder who’s written dozens and edited hundreds of articles that help Americans make better financial decisions on everything from credit cards to mortgages to savings accounts. He’s well-versed in fact-checking content for accuracy, editing copy to remove biases and ensuring our content remains independent from affiliates, advertisers and partners. Prior to his role at Finder, Kelly led editorial newsrooms in the creation of award-winning content as a managing editor in the digital space. He holds a BA in Sociology from the University of Kansas. See full bio
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