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Reverse Mortgage vs. HELOC: Which Should I Choose?

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If you’re 62 years or older and thinking of accessing some of your home’s equity, you may be weighing the pros and cons of a reverse mortgage versus a home equity line of credit. Both options give more flexibility than other types of loans, but they also come with risks worth considering before you decide which is best for your financial needs.

How to decide between a reverse mortgage and a HELOC

A reverse mortgage is a program exclusively for homeowners 62 years or older that allows them to convert their home equity to cash in different ways. Rather than making monthly payments, the balance grows with time rather than shrinking — the “reverse” of a regular mortgage.

A home equity line of credit (HELOC) works like a credit card secured against your home. You can borrow from your line of credit for a set time called a “draw period” (usually 10 years), after which you’ll need to pay the balance off in fixed payments. You only make payments on the credit you use during the draw period and can pay the balance off and re-use it as you wish.

Below is a side-by-side list of reasons you may consider a reverse mortgage versus a HELOC to tap your home equity.

A reverse mortgage makes sense if: A HELOC makes sense if: 
You can’t qualify for a HELOC You aren’t old enough to qualify for a reverse mortgage
You don’t want a monthly housing payment You can afford the monthly payment
You want to receive your equity in regular monthly installments You want the option to make interest-only mortgage payments
You understand that your equity is dropping each month you have a balance You want to have access to funds as needed, but can pay the balance off with other assets
You want more options for how you access your equity You want a safety net to cover unexpected expenses
You own your home outright or have at least 50% equity You don’t have enough equity to qualify for a reverse mortgage

Reverse mortgage vs HELOC: What’s the difference?

Reverse mortgages and HELOCs are unique home loan products that give homeowners extra flexibility for tapping and using their home equity versus traditional fixed-rate mortgages. However, the two loans work very differently.

Loan type Reverse mortgage HELOC
Monthly payment None required Based on the amount drawn
Options for tapping equity Equity can be received as:

  • A monthly payment
  • A line of credit
  • A lump sum
  • As both a monthly payment and a line of credit
Equity can be received by:

  • Charging as much as needed during the draw period
Closing costs Up to $6,000 in lender fees, plus upfront and ongoing mortgage insurance costs 2% to 5% of the line of credit
Occupancy requirement Must live in the home as a primary residence for most of the year Can take out a HELOC on investment property and second homes
Mortgage insurance 2% of your home’s value for upfront mortgage insurance premium (UFMIP)

0.5% annual ongoing mortgage insurance premium (MIP)

None required
Credit qualifying requirements
  • Prove ongoing expenses can be paid
  • No DTI ratio requirements
  • Minimum credit score of 620
  • DTI ratio of no more than 50%
Your current equity Must have at least 50% equity in most cases Must have at least 15% equity
Credit counseling Required from a HUD certified counselor N/A

THINGS YOU SHOULD KNOW

Both a reverse mortgage and HELOC are secured by your home. That means the lender could foreclose on your home if you default. Even though you don’t make monthly payments on a reverse mortgage, the lender could still foreclose if:

  • You stop living in the home as your primary residence
  • You’re unable to pay ongoing expenses like property taxes and insurance
  • You or your spouse passes away and your heirs are unable to sell or refinance your home

Pros and cons of a reverse mortgage vs a HELOC

While the reverse mortgage has some advantages over a HELOC — primarily that you don’t have a monthly payment — there are some important drawbacks.

Pros of a reverse mortgage vs a HELOC

  You won’t have a monthly payment, regardless of the loan balance

  You can choose to receive equity in regular monthly payments, as a line of credit or as both income and as a line of credit

  You don’t have to qualify based on income

Cons of a reverse mortgage vs a HELOC

  You must be 62 years old to be eligible for a reverse mortgage

  You lose equity as your loan balance gets larger each month

  You’ll pay higher reverse mortgage closing costs and mortgage insurance that aren’t required for a HELOC

  Your fixed-income benefits (such as Supplemental Security Income or Medicaid) may be reduced if you receive monthly reverse mortgage payments

  You’ll reduce the amount of equity that will go to your heirs when you pass away

Alternatives to a reverse mortgage or HELOC

If you’re looking to tap your home equity with a fixed monthly payment paid out in a lump sum, you might consider the following alternatives.

Home equity loan. With a home equity loan, you’ll receive your funds in one lump sum payment and make fixed monthly payments for five to 15 years, in most cases. If you want the security of a stable monthly payment and qualify for the loan, a home equity loan may be a good choice.

Cash-out refinance. If you need a bigger chunk of cash and can qualify based on your current income, a cash-out refinance allows you to tap equity up to 80% of your home’s value (in most cases) and spread the payment out over 30 years. If you’re an eligible military borrower, you may be able to borrow up to 90% of your home’s value with a loan backed by the Department of Veterans Affairs (VA).

 

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