Seniors looking to tap home equity face a choice between a reverse mortgage and a Home Equity Line of Credit (HELOC). While both can provide funds against your home value, they have key differences to understand. This guide compares the pros and cons of reverse mortgages versus HELOCs.
Reverse Mortgage Pros and Cons
A reverse mortgage converts a portion of your home’s equity into cash available to you. Consider these advantages and disadvantages:
Pros
- Requires no monthly repayment as long as you live in the home
- Provides greater access to home equity than a HELOC
- Does not require repayment until home is sold or vacated
- Allows you to retain ownership of the home
- Proceeds are tax-free
Cons
- Higher upfront costs than a HELOC
- Interest rates may be higher
- Reduces equity available to heirs
- Lower total funds available than a HELOC if repaid quickly
- Requires homeowner’s insurance and taxes be paid
Reverse mortgages provide flexible access to home equity but reduce what heirs may inherit.
HELOC Comparison
Like a HELOC, a reverse mortgage taps home equity, but has key differences:
- Age: Reverse mortgage requires being age 62+, HELOC has no age minimum.
- Payment Terms: HELOC has monthly payments, reverse mortgage does not until home is sold.
- Credit Approval: HELOC depends on credit score, income, debt-to-income ratio. Reverse mortgage does not require strong credit.
- Interest Rates: HELOCs have variable rates, reverse mortgages have fixed rates.
- Fees: Reverse mortgage has higher upfront costs, HELOC has lower or no upfront costs.
- Amount: Reverse mortgage provides greater access to equity, HELOC limits draw to approved amount.
- Tenure: Reverse mortgage is designed for long tenure in home. HELOC best if repaid within 10 years.
A HELOC provides lower cost financing for short term needs. A reverse mortgage supports long-term retirement cash flow.
FAQs:
Reverse mortgage vs. HELOC: Which is better for me?
The main factors in deciding between a reverse mortgage and HELOC are your age, how long you plan to stay in your home, and whether you can afford a HELOC’s monthly payments. Reverse mortgages allow greater access to home equity but reduce what heirs inherit. HELOCs require repayment so preserve equity for heirs but have lower borrowing limits. Meet with a financial advisor to review your overall situation.
What are the advantages of a reverse mortgage over a HELOC?
The main advantages of a reverse mortgage compared to a HELOC are:
- No required monthly repayments
- Access to greater amounts of your home equity
- No credit score or income requirements
- Option for fixed interest rate
- Designed for long-term homeowners
Reverse mortgages provide flexible equity conversion designed for retirement needs.
Can I convert a HELOC to a reverse mortgage?
It may be possible to convert an existing HELOC to a reverse mortgage. The amount you already borrowed under the HELOC will count against the reverse mortgage lending limit. You may need to pay off a portion of the HELOC balance first to qualify for enough reverse mortgage proceeds to make it worthwhile. Talk to a reverse mortgage lender to go over the options.
How do repayment terms differ between a reverse mortgage and a HELOC?
A HELOC has monthly payments and a set repayment period whereas a reverse mortgage does not require repayment until you sell the home or move out. A HELOC is due in full usually within 10 years. A reverse mortgage comes due only when the last surviving borrower sells the home or passes away. This lets homeowners stay in the home long-term. However, interest continues accruing on a reverse mortgage, reducing equity available to heirs.