Reverse Mortgage vs. Home Equity Loan

Reverse mortgages, home equity loans, and home equity lines of credit (HELOC) are all financial products that allow homeowners to borrow against the equity they have in their houses. All three enable borrowers to use the money for purposes such as paying off debt, renovating their homes, or covering living expenses. The different loan options differ regarding payment terms and who is eligible, so be sure to do your research and choose the mortgage product for your needs.

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    What is a reverse mortgage?

    A reverse mortgage is a type of loan specifically designed for homeowners 62 years or older. This type of mortgage allows people to borrow against the equity they have in their homes. They can take the loan in the form of a single lump sum, a revolving line of credit, or fixed monthly payments. This type of loan can help to cover living expenses for retired individuals. They can also be used for purposes such as paying off debt or making improvements to the home.

    [ Read: 6 Reasons to Think Twice Before You Take Out a Mortgage ]

    Unlike most types of loans, reverse mortgages don’t require monthly payments to pay back the money. As long as the homeowner lives in the home, they can keep the funds. But once the person dies, sells the home or moves out, they’ll have to pay back the loan. Often the heirs of the borrower pay back the loan by selling the home after the homeowner dies.

    There are some federal regulations in place to protect people against potential negative outcomes with these loans. First, homeowners can’t borrow more than the home’s value. And if the home decreases in value to the point where the loan exceeds what the home is worth, borrowers won’t have to pay back the full amount.

    What are home equity loans and HELOCs?

    Home equity loans and home equity lines of credit (aka HELOCs) are both financial tools that allow you to borrow against the equity you have in your home. Both allow you to borrow up to a certain percentage of the value of your home. With both the home equity loan and HELOC, you’ll have a relatively low interest rate and will make monthly payments to pay back the money.

    [ Next: Consider These 3 Things Before Getting a Home Equity Loan ]

    While very similar, the two financial tools also have some differences. A home equity loan is a lump sum that you borrow from a lender at a fixed interest rate. As with other loans, the interest rate and monthly payment are specified ahead of time. Once you pay back the lump sum, the loan account is closed.

    A HELOC, on the other hand, is a revolving line of credit, similar to a credit card. Borrowers have access to a certain amount of money, usually for a predetermined period of time. They can borrow and pay back the funds monthly during that time. Once the life of the HELOC ends, borrowers enter a repayment period where they make monthly payments until they fully pay back what they owe, even if they didn’t borrow up to the limit of the line. Unlike home equity loans, HELOCs often come with variable interest rates, usually set as the prime rate plus a percentage, determined by the lender.

    Reverse mortgage vs. home equity loan

    Reverse mortgages and home equity loans are two financial products that allow homeowners to borrow against their homes’ equity. In most cases, borrowers of these loans can use them for any purpose they want, including paying off debt, renovating their homes and paying for basic living expenses. But despite their similarities, reverse mortgages and home equity loans have plenty of differences.

    • Who is eligible: Only homeowners age 62 or older are eligible for a reverse mortgage. In contrast, homeowners of any age with equity in their homes can use a home equity loan or HELOC.
    • How the money is received: Borrowers of reverse mortgages can choose to receive their funds in one lump sum, in fixed monthly payments, or in the form of a revolving credit line. Home equity loans are a single lump sum of money, while HELOCs are a revolving credit line available for a finite number of years.
    • When they must be paid back: Reverse mortgages don’t have to be paid back until the original borrower dies or sells the house. Often these loans are paid back by the borrower’s heirs with the sale of the house. On the other hand, home equity loans must be paid back on a fixed payment schedule. HELOCs don’t have to be fully paid back until after the line of credit has closed and the repayment period begins.
    • Closing costs and fees: Home equity lines of credit and HELOCs tend to come with lower closing costs and fees than reverse mortgages. As a result, the borrower gets to keep more of the money.

    When you should get a home equity loan or HELOC

    If you need a lump sum of money to pay off debt or renovate your home but plan to pay it off, then a home equity loan or HELOC are probably your best options. These tools allow you to borrow against the equity in your home as long as you’re able to pay it back. They typically come with lower closing costs and fees than a reverse mortgage. So unless you’re over 62 years old and don’t feel confident that you’ll be able to pay off the loan, home equity loans or HELOCs are probably the way to go.

    But how do you choose between a home equity loan and a HELOC? A few things to consider are:

    • Home equity loans have fixed interest rates, while HELOCs typically have variable rates. If you want the certainty of a fixed rate, opt for a home equity loan.
    • Home equity loans are for a single lump sum, while HELOCs allow you to borrow money on a revolving basis. If you know exactly how much you need, you can choose the loan. But if you plan to make several home improvements over a number of years and aren’t sure of the exact cost, a HELOC might be the way to go.

    [ Related: How to Pay for Home Improvements ]

    When you should get a reverse mortgage

    A reverse mortgage might be the right choice if you need a source of income to help cover your living expenses during retirement. The real advantage of the reverse mortgage vs. a home equity loan or HELOC is that you don’t have to pay a reverse mortgage back until the original borrower dies or sells the home. Let’s say that you were 62 years or older and hadn’t saved quite enough to pay all of your living expenses in retirement. You could take out a reverse mortgage to make up the difference.

    A reverse mortgage may also be a good idea if you need money now and plan to pay it back but aren’t entirely sure that you’ll be able to right away. While a reverse mortgage doesn’t have to be paid back until the borrower dies or sells the home, they can pay back the loan earlier if they want to.

    [ Read: Compare the Best Mortgage Rates ]

    Suppose someone over the age of 62 got hit with a huge medical bill and didn’t have the funds to cover it. They aren’t sure when they’ll be able to start paying back the loan, so the fixed payments of a home equity loan might not work. Instead, they can take out a reverse mortgage, and if the time comes when they have the funds to pay it back, they can. And if they can’t come up with the money, then it can be paid off with the sale of the house.

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    Reviewed by

    • Angelica Leicht
      Angelica Leicht
      Mortgage Editor

      Angelica Leicht is an editor at The Simple Dollar who specializes in mortgages, mortgage refinancing, home equity loans, and HELOCs. She is a former contributing editor to Interest.com and PersonalLoans.org.