You've built up a healthy amount of equity in your home, and now you want to tap into that value for some extra cash to help with expenses. If so, a big question you need to answer is what's the better way to go: reverse mortgage or HELOC?
As is often the case with financial tools, it isn't that one approach is inherently better than the other. It comes down more to determining the right fit for your situation. To make that determination, it is helpful to know some of the basic characteristics of reverse mortgages and HELOCs, and then to ask yourself some key questions.
Reverse Mortgage or HELOC: Characteristics
What reverse mortgages and HELOCs have in common is that they are both ways of borrowing against the equity in your home. However, they operate in very different ways.
A reverse mortgage lends you money in the form of a steady stream of payments over time, and generally does not require repayment in cash. Instead, a reverse mortgage is designed to be repaid by transferring ownership of your home to the lender, typically upon the death of yourself or your spouse, whichever comes later.
In contrast, rather than providing a regular stream of payments, a HELOC provides access to a specified amount of credit as you need it. This allows you to borrow money in bigger chunks when needed, but also allows you to refrain from borrowing when you don't need immediate cash. Once money is borrowed from a HELOC, you have to start paying it back in regular installments.
Reverse Mortgage or HELOC: Key Questions
Here are some questions that will help you understand how those different sets of characteristics align with your needs:
- Are you aged 62 or older? If not, then the reverse mortgage option is off the table for the time being. You have to be 62 to qualify for a reverse mortgage.
- Do you own your home outright or have a fairly low mortgage balance? While you can have a HELOC as a secondary mortgage in addition to a primary mortgage, you cannot have a reverse mortgage in conjunction with another loan on the property. So, in order to get a reverse mortgage, you either need to own your home outright or be able to pay off the existing mortgage from initial proceeds of the reverse mortgage.
- Do you expect to be able to pay back money you borrow against your home? If you are taking out the loan for near-term needs but expect to have enough money to make loan payments once you get past those needs, then a HELOC may be the best fit. However, if your budget is too tight to allow for loan payments, then a reverse mortgage is probably a better option.
- Do you want to leave your home to your heirs? If you want to pass the property along to future generations, then a reverse mortgage is not for you since the house would eventually be likely to go to the lender to pay off the loan.
- Do you have a regular, ongoing need for extra money? If you are seeking to tap into equity because your current income is not sufficient to meet living expenses, then a reverse mortgage may be a better fit since it would provide an ongoing cash flow that does not have to be paid back as long as you are in the home. However, if you are just looking for extra money for some specific, one-time expenses, then you might be better off with a HELOC that lets you borrow just what you need and then work towards paying it back.
Deciding which vehicle is right for your situation is just the first part of the decision process. You then have to find the lender with the best terms for your reverse mortgage or HELOC. Comparing interest rates, fees, and repayment terms will determine both the size of the periodic payments and the long-term total amount of money involved.
So, step one is to determine which vehicle is right for you, and then step two is to do some comparison shopping to get the best deal.