Which one is best for you depends on factors like your financial goals, borrowing needs and age. Know how each option works and what to look out for.
How do reverse mortgages and HELOCs compare?
A reverse mortgage is for qualified homeowners 62 years or older. Unlike a traditional mortgage — making payments toward equity — the lender sends you money against the equity you have in your home. Reverse mortgages that are insured by the U.S. Department of Housing and Urban Development (HUD) are called home equity conversion mortgages (HECMs).
A home equity line of credit (HELOC) is a revolving credit line attached to your home. Since it’s a line of credit and not a lump sum, it can be a good option if you need to withdraw money in phases — for example, to fund a major renovation or to pay for college tuition. HELOCs have two payment periods. The first phase is a draw period where you can withdraw cash and only pay interest on what you borrow. The second phase is the repayment period, where you’ll start paying back the loan balance plus interest.
|Interest rates||Fixed or variable||Variable|
|Maximum loan amounts||Borrow up to $548,250 for HECMs||Borrow up to 85% of your home’s value|
|Repayment terms||When the borrower moves or dies||Up to 20 years|
Learn more about Reverse mortgages
Learn more about HELOCs
Choose a reverse mortgage if:
You’re age 62 or older and want to supplement your retirement income. A reverse mortgage may be best if you have completely paid off your home loan and don’t plan to move. A reverse mortgage is a long-term borrowing option. Though there’s no specific income requirement, you must demonstrate that you can meet your other financial responsibilities — such as paying property taxes and homeowner’s insurance.
Avoid this loan type if:
Your heirs want to inherit your home, or you have a surviving spouse that’s not named as a borrower on the loan. As soon as the borrower dies or moves out, the loan matures and the outstanding debt is due. The bank generally pays off the loan by selling the property. If your heirs want to keep the house, they’ll need to pay the loan.
Choose a HELOC if:
You need cash for short-term borrowing and are looking for a lower interest rate than traditional loans. You’ll need to have at least 15% equity in your house and, typically, a FICO score of at least 680. Lenders also want to see a maximum debt-to-income (DTI) ratio of 43%.
Avoid this loan type if:
You can’t afford the fees. Your HELOC may have fees on top of your interest payments. For example, you may see an application fee, closing costs of up to 5% of the loan amount, an annual fee of up to $100 and an inactivity fee of up to $100. If you can’t afford the charges and HELOC payments, you may risk foreclosure. Consider another type of loan if you’re looking to borrow a lump sum instead of periodic withdrawals.
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Reverse mortgages are typically best for older borrowers interested in long-term financing. HELOCs tend to be better for short-term borrowing and give you access to cash when you need it. Compare mortgages to find the best option to leverage your home’s equity.
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