Comparing Reverse Mortgage vs. HELOC

Comparing Reverse Mortgage vs. HELOC
Betsalel Cohen
Sep 14, 2010
  • clock icon
    3 min read
Key Takeaways:
  • Learn the differences between HELOC and Reverse Mortgage
  • Compare the Pros and Cons of a Reverse Mortgage vs. HELOC

Reverse Mortgage or HELOC - Which Loan is Right for You

One alternative to reverse mortgages many consider is taking out a home equity loan or line of credit. Although both loan options can provide homeowners with extra income, there are several key differences:

Home Equity Loan/HELOC

A home equity loan is a traditional mortgage product that allows a homeowner to borrow money by securing the loan against the home. The homeowner makes monthly payments to repay the money borrowed in a home equity loan. The property is used as collateral in the event that the homeowner fails to repay the loan.

Consider a home equity loan or HELOC if:

  • You do not meet the age and equity requirements of a reverse mortgage
  • You have income sufficient to cover monthly payments
  • You only need to borrow a small amount of money (i.e. <$100,000)
Home Equity Loan ProsHome Equity Loan Cons
Low closing costs with no loan servicing fees and insurance premiumsMust make monthly payments to repay the home equity loan
Retain the equity to your home at the end of the loanMust make monthly payments to repay the home equity loan
No equity or age requirementsLender can foreclose on your property if you fail to make monthly payments
Tax deductible interest in many casesNeed to have excellent or good credit and have a low debt to income ratio

Home Equity Loan Pros & Cons. Source: Bills.com

Reverse Mortgage

Unlike a home equity loan, a reverse mortgage requires no payments to be made to the lender until the homeowner(s) pass away, move, or sell the home. The loan is repaid with the proceeds from the home sale or by refinancing the loan. You are only required to continue making payments for property taxes and insuring your home.

Consider a reverse mortgage if:

  • You do not have enough income or high enough credit to qualify for a home equity loan
  • You cannot afford the monthly payments on a home equity loan
  • You need a large amount of supplemental income
Reverse Mortgage ProsReverse Mortgage Cons
No credit and income requirementsHigh closing costs
No monthly paymentsMust be 62 years old or older and have substantial equity in your home
The lender cannot foreclose on your property because there are no monthly paymentMay have little to no equity remaining after the loan is repaid
Tax free income

Reverse Mortgage Pros & Cons. Source: Bills.com

Reverse Mortgage vs. Home Equity Loan/HELOC

Reverse MortgageHome Equity Loan
Purpose of LoanTo receive income by releasing the equity in the homeTo receive income by securing a loan against the home
Credit QualificationNoYes – Typically good credit
Income QualificationNoYes – Must be able to make monthly payments
Age QualificationYes – Must be 62+No
Equity QualificationYes – Must have paid off mortgage or have a low mortgage balanceNo
Closing Cost AmountHighLow
Origination FeeYesYes
Appraisal FeeYesYes
Insurance PremiumYes – 2% of loan amount up front plus 0.5% annually on outstanding loan balanceNo
Loan Servicing FeeYes – $30 to $35 per monthNo
Payments to lenderNoneMonthly payments
Non-repayment issuesNone – consumer is not making monthly payments to lenderLender can foreclose if no payment is made
Equity at end of loanNo equityEquity is retained after loan is paid off

Reverse Mortgage vs. Home Equity Loan. Source: Bills.com

Get up to 5 competing mortgage quotes