Two popular options that allow you to tap into your home equity without the need to sell your home are a reverse mortgage loan and a home equity loan. Understanding both of these options can help you decide which is better for you.
Reverse Mortgage
A reverse mortgage loan allows you to access a portion of your home’s equity without having to make monthly mortgage payments for as long as the loan obligations are met.1 You can use the proceeds anyway you choose and you have various disbursement options to select from: lump-sum,2 line of credit, monthly payments or a combination.
Home Equity Loan
A home equity loan also allows you to access a portion of your home’s equity but unlike a reverse mortgage you are required to make monthly payments and the only disbursement option is a lump sum. With a home equity loan you’re still responsible for paying property taxes and homeowner’s insurance as well as up-keeping the maintenance of the home. However, it’s important to note that you risk losing your home to foreclosure if you default on the loan payments.
Key Differences
| Reverse Mortgage | Home Equity Loan | |
| Disbursement Options | Lump sum2 Line of credit Monthly payments Combination of all three |
Lump sum |
| Repayment | None required for as long as the loan obligations are met1 | Monthly payments are required over a set amount of time |
| Age and Equity Requirements | Must be at least 62 and own the home outright or have sufficient equity to pay off any existing liens | No age requirement and must have at least 20% equity. |
| Credit and Income Requirements | A minimum score is not required; however, the borrower(s) must pass financial assessment. | A credit score of at least 620, debt-to-income ratio of less than 43%. |
| Best Use | Long-term income source | Short-term cash |
| Interest Rate Options | Fixed and variable | Fixed |
The Bottom Line
Both a reverse mortgage and a home-equity loan will allow you to convert a portion of your home’s equity into cash and bring their pros and cons. The option you select will highly depend on your lifestyle and financial goals, credit standing, and your financial solvency. If you’d like to learn more about reverse mortgages try our calculator above to receive a quick estimate of how much you may be eligible to receive.
Important Disclosures:
1 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to Federal Housing Administration (FHA) requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
2 Only available on fixed rate loans