Reverse Mortgage Versus Home Equity Loan: The Cash-in-Hand Faceoff

Key takeaways

• To apply for a reverse mortgage, you must be at least 62 years old and own substantially all of your home. You can opt to receive a lump sum, line of credit, term of installments or a combination of the three.

• Any homeowner can apply for a home equity loan. Most lenders require applicants to have at least 20% home equity.

• With both options, you can use the cash however you see fit – for living expenses, home improvements, to pay off debt or other. Both still require you to use your home as collateral.

Owning your home provides a sense of security and stability. When you need cash in hand, you may be able to put the equity you’ve accumulated in your home to use.

Two common tools are the reverse mortgage and the home equity loan. If you are weighing the options between a reverse mortgage and a home equity loan, you might consider the amount of money needed and for how long, whether you plan to pass your home on to your children, and how strong your credit profile is.

Either option gives you cash, but functions entirely differently.

Reverse mortgage or HEL? The differences

A reverse mortgage and a home equity loan are two ways you might be able to tap into your home’s equity. When accessible, equity – the difference between any outstanding mortgage principal and your home’s current value – can provide cash-on-hand for any need you have.

What is a reverse mortgage?

A reverse mortgage is the opposite of a forward (or traditional) mortgage. Rather than paying a lender monthly payments plus interest, the bank pays you. The bank gains a larger share of your home’s equity with each payment. Your debt, therefore, can increase over time.

Although the bank will have an interest in your home, you still keep the title. You could lose the title once you:

• Move out for over a year (even involuntarily due to a medical need)

• Sell the home

• Die

• Fall behind on property taxes or insurance payments

• Allow the home to fall into disrepair

At that point, the lender may sell the home to collect the cash it lent you, and any outstanding fees. Any leftover equity will pass on to you or your children (or other designated beneficiary).

Types of reverse mortgage payment plans can include:

• Lump-sum: The lender provides cash all at one time. This is the only option with a fixed-interest rate.

• Line of credit (LOC): The LOC is irrevocable by the lender, and you only pay interest at an adjustable rate on the funds you use.

• Term installments: This works like monthly installment payments over a set term.

• Modified term: The modified term combines the installment plan with a LOC, which remains available past the term’s end date.

• Tenure: As long as one of the borrowers remains in the home as the primary residence, you can receive installment payments for life.

• Modified tenure: Like the tenure plan, this plan provides a lifetime of payments, plus a line of credit.

What is a home equity loan?

In contrast to a reverse mortgage, a home equity loan is available to any homeowner – regardless of age. Most lenders require the homeowner to have at least 20% equity in their home. You use your home as collateral in exchange for a lump sum, subject to interest, usually at a fixed rate.

Unlike a reverse mortgage, a home equity loan is a second mortgage.

Which is best for you?

With both a home equity loan and reverse mortgage, you can use the cash to pay for living expenses, healthcare costs, debt refinance, home renovations or anything else you choose.

Here’s how each option compares:

Reverse Mortgage

• Can be paid out as installments, lump sum, line of credit or a combination of these.

• Loan possibly due at death, when you move out for over a year, or you become delinquent on taxes or insurance.

• Must be age 62 and own home outright (or small mortgage remaining).

• There may be no income requirement, but the lender may seek assurance that you can afford taxes, insurance and home maintenance costs.

Home Equity Loan

• Paid out in a lump sum.

• Loan can be repaid monthly over a set period subject to interest.

• No age requirement, but most lenders require at least 20% equity.

• Until tax year 2025, may only deduct interest if you spend the money on a qualified expense (e.g., home improvements).

• Must have steady income and a strong credit profile.

You might also evaluate how long you’ll need this source of income. A longer period may weigh in favor of a reverse mortgage. But remember that a reverse mortgage could make it more likely that your home may go to the bank instead of your estate or heirs.

When you have a spouse, you might also closely review a reverse mortgage’s terms to ensure your spouse is protected. So long as both spouses are on the mortgage, the bank may not be able to sell the home until both die or are no longer living in the home.

While both the reverse mortgage and home equity loan can require closing costs similar to those charged in a traditional loan closing, a reverse mortgage’s closing costs may be higher due to regulatory issues. Lenders may also charge higher closing fees to compensate for the higher risk they consider reverse mortgages to carry. Homeowners also must attend mandatory counseling sessions.

Due to the closing process, it generally takes longer to receive cash from a reverse mortgage than from a home equity loan. A home equity loan could close in less than six weeks.

Finally, you may consider reviewing your credit profile to determine whether a home equity loan is possible. A home equity loan lender may impose a basic credit requirement while a reverse mortgage provider might not.

Access home equity with Unlock Technologies

A home may be the largest asset of most families. When you’ve established home equity, another way to access it is with a home equity agreement(HEA).

Unlike a reverse mortgage or home equity loan, the HEA provider gives you a lump sum upfront in exchange for a percentage of your home’s future value. There are no monthly payments.

To find out if a home equity agreement is right for you, contact us today.