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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:
||Equity can be received by:
|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)
|Credit qualifying requirements||
|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|
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).