Should You Get a Reverse Mortgage or Home Equity Loan? A Detailed Comparison

Getting older comes with financial challenges, especially if retirement savings fall short. Many seniors find themselves living on fixed incomes that don’t cover rising living costs. Tapping into home equity can provide funds to bridge the gap But should you get a reverse mortgage or home equity loan? I compared the two options in detail to help you decide

A reverse mortgage and a home equity loan allow you to access your home’s equity without having to sell or move out But they work differently

• With a reverse mortgage, the lender pays you. You get funds as a lump sum, line of credit, monthly payments, or a combination. The loan comes due when you sell the home, pass away, or move out for over a year.

• A home equity loan provides funds upfront in a lump sum. You repay it with fixed monthly installments like a traditional mortgage.

Both carry risks like falling home values and foreclosure. But for cash-strapped seniors, tapping home equity can provide financial relief. Here’s how the two loans compare.

Reverse Mortgage Pros and Cons

Reverse mortgages have unique advantages and disadvantages to weigh:

Pros

• No required mortgage payments. You aren’t required to make monthly payments on the loan. It only comes due under certain conditions.

• Income flexibility. You can receive funds as a lump sum, line of credit, monthly payments, or a combination based on your needs.

• No income requirements. Your income isn’t a factor in qualifying for a reverse mortgage.

• Retain home ownership. You keep your name on the property title and can stay in your home.

Cons

• Closing costs. Reverse mortgage closing costs are typically higher than a traditional mortgage, often between $2,000-$6,000.

• Diminishing equity. The loan balance grows over time as interest accrues, decreasing the equity left for you and your heirs.

• Repayment risks. Your heirs may need to sell or repay the loan to keep the home if you pass away or move out.

• Falling home values. If your home depreciates, loan repayment could exceed its sale value.

Home Equity Loan Pros and Cons

Home equity loans also have unique tradeoffs:

Pros

• Fixed payments. Your monthly payment stays the same based on the fixed interest rate.

• Faster funding. Home equity loans can fund in as little as 2 weeks, faster than a reverse mortgage.

• Tax deductions. You may deduct interest if funds are used for home improvements.

• Younger borrowers. Home equity loans have no age requirements like reverse mortgages.

Cons

• Credit and income requirements. You’ll need a good credit score and stable income to qualify.

• Monthly payments. You must make monthly principal and interest payments.

• Closing costs. Expect closing costs between 2-5% of the loan amount.

• Repayment risks. Not making payments risks delinquency and foreclosure.

Key Differences Between the Loans

Beyond their unique pros and cons, reverse mortgages and home equity loans differ in other important ways:

• Age: Reverse mortgage borrowers must be 62 or older. Home equity loans have no age requirements.

• Payments: Reverse mortgages have no required monthly payments. Home equity loans require fixed monthly payments.

• Interest: Reverse mortgages have variable interest rates that compound over time. Home equity loans have fixed interest rates.

• Credit: Reverse mortgages look at your ability to pay property taxes and insurance. Home equity loans require good credit.

• Closing costs: Reverse mortgages have higher upfront costs, often north of $2,000. Expect 2-5% for a home equity loan.

• Home ownership: Reverse mortgages allow you to retain ownership and stay in the home. You risk foreclosure if you default on a home equity loan.

Which Loan Is Right for You? Key Factors to Consider

Choosing between a reverse mortgage and home equity loan depends on your unique situation and financial needs:

How long do you plan to stay in the home?

Reverse mortgages make sense for seniors who want to age in place. The loan won’t come due as long as you live in the home. Home equity loans may be better if you plan to downsize soon.

What are your income and credit scores?

Reverse mortgages look at your ability to pay property charges but not your income. Home equity loans require good credit and stable monthly income to qualify.

Do you need ongoing income or a lump sum?

Reverse mortgages offer flexible income options including monthly net income. Home equity loans provide funds upfront in a single lump sum.

Will you have issues making monthly payments?

Reverse mortgages have no required monthly payments. If you can’t commit to monthly installments, this option removes that burden.

How much equity do you need to access?

Most lenders let you borrow up to 60% of your home’s value with a reverse mortgage. Home equity loans usually max out at 80-85% loan-to-value.

Are you looking to eliminate mortgage debt?

Since you don’t make payments on a reverse mortgage, it won’t help pay off your existing mortgage. A home equity loan can help consolidate high-interest debt.

Do you want to leave the home to your heirs?

With a reverse mortgage, you own the home but your heirs may need to sell or repay the loan balance. A home equity loan is less likely to impact inheritance.

The Bottom Line

Reverse mortgages and home equity loans offer two strategies for turning home equity into cash. For seniors needing retirement income, a reverse mortgage provides flexible income without monthly payments. Home equity loans require good credit and income but allow younger borrowers to access equity.

Consider your financial situation, needs, and goals carefully to decide if a reverse mortgage or home equity loan better fits your circumstances. Seek professional advice to ensure you understand all options, costs, and risks before moving forward. With the right choice, tapping your home equity can provide funds to enjoy your retirement years.