Reverse Mortgage Vs. Home Equity Loan Vs. HELOC

The equity in your home may be one of the biggest assets that you have, especially if you’ve lived a long time in your home and/or it has appreciated significantly over time. Reverse mortgages, home equity loans and home equity lines of credit (HELOCs) are three different financial products that all allow you to access the equity in your home to further your overall financial goals.

While not all lenders offer all of these home equity products, they are all common enough that you should be able to find a lender that can suit your needs. Taking a look at how reverse mortgages compare with home equity loans and HELOCs will help you choose the product that is best for you.

In Brief: The Power Of Home Equity

If you own your home, it is likely one of your biggest assets. The difference between your home's value and the total amount of any loans or mortgages on the property is referred to as your home's equity. Home equity can be used as collateral to help finance home improvements or other large expenses. Reverse mortgages, home equity loans and HELOCs are three ways to harness the power of your home's equity. Note that some lenders, like our friends at Rocket Mortgage, may not offer one or all of these options.

At A Glance: Home Equity Loan Vs. Reverse Mortgage Vs. HELOC

Here's a quick look at how home equity loans, reverse mortgages and HELOCs compare. Note that interest rates for these products can vary broadly depending on various factors.

What Is A Reverse Mortgage?

A reverse mortgage is one way that certain borrowers with significant equity can access that equity. To be eligible for a reverse mortgage, generally you have to be at least 62 years old and either own your home outright or have a very small mortgage amount. Reverse mortgage borrowers still have monthly payments and are required to cover maintenance items like property taxes, maintenance and homeowners insurance.

Types Of Reverse Mortgages

There are several different types of reverse mortgages — here is a quick look at three of the most common:

Single-Purpose Reverse Mortgage

A single-purpose reverse mortgage is one of the most common types of reverse mortgages. Single-purpose reverse mortgages are often issued by government agencies or nonprofit organizations. With a single-purpose reverse mortgage, the lender may limit what the borrower can do with the funds that they receive.

Home Equity Conversion Mortgage (HECM)

A Home Equity Conversion Mortgage (HECM) is another type of reverse mortgage that is typically guaranteed by the Federal Housing Administration (FHA). Because an HECM is guaranteed by the FHA, borrowers have additional protections and benefits, including a lower interest rate and fewer fees as compared to other kinds of reverse mortgages. To apply for an HECM, a borrower must work with a bank where the FHA sponsors the reverse mortgage product offered.

Proprietary Reverse Mortgage

A proprietary reverse mortgage (often called a jumbo reverse mortgage) is a type of reverse mortgage that allows borrowers to borrow a higher amount of their equity than other types of reverse mortgage. Reverse mortgages backed by the FHA have a maximum amount, which is $1,149,825 for 2024. If you have more equity than that, you may want to use a proprietary or jumbo reverse mortgage.

Reverse Mortgage Pros And Cons

Here's a look at some of the pros and cons of a reverse mortgage:

What Is A Home Equity Loan?

A home equity loan is another financial product that helps homeowners access the equity in their home. Unlike a reverse mortgage, there are no age requirements with a home equity loan, though you will need to have a significant amount of equity in your home. Most lenders will only lend up to around 80% of your home's value in a home equity loan, so you will need to have at least 20% equity (and likely much more). Home equity loans are often known as second mortgages (as are HELOCs) and are commonly used to fund home improvements.

Pros And Cons Of A Home Equity Loan

Here's a look at some of the pros and cons of a home equity loan: 

What Is A HELOC?

A home equity line of credit (HELOC) is another way you can access your home's equity.

Like a home equity loan, there are no age requirements for a HELOC — you simply need to have sufficient equity in your home to borrow against. HELOCs share some of the same characteristics of a credit card in that you have a maximum limit that you can borrow. You can borrow as much as you want, up to this limit. During the initial draw period, you have variable payments (often interest-only payments), based on the amount that you have borrowed. Once the repayment period hits, you will then begin repaying the interest as well as the principal loan amount.

Pros And Cons Of A HELOC

Here's a quick look at some of the pros and cons of a HELOC:

Key Differences Between Home Equity Products

While these three types of home equity products share some similarities, there are also some key differences that you'll want to be aware of.

Credit Score And Income Requirements

Both a home equity loan and a HELOC require you to meet certain credit score, debt-to-income ratio (DTI) and income requirements. The healthier your overall financial picture, the lower interest rate and/or fees you may pay with these products. In contrast, with a reverse mortgage, your credit score and financial picture are generally not considered by the lender.

Age Requirements

To qualify for a reverse mortgage, you generally need to be at least 62 years of age. Younger borrowers will not be able to apply for a reverse mortgage. In contrast, there are no age requirements for a home equity loan or HELOC.

Application Requirements

The specific application requirements will vary depending on the type of product that you choose and the lender that you are working with. Generally speaking, you will need to provide more detailed financial information when applying for a HELOC or home equity loan, since approval and rates for those types of products will depend on your credit score and financial health. One other thing to consider is that with many reverse mortgage products, borrowers are required to receive mandatory Department of Housing and Urban Development (HUD) counseling.

Closing Costs And Other Fees

Nearly all financial products and loans have certain origination fees and closing costs associated with the loan. These closing costs and fees will vary depending on the lender you choose, your financial health and credit score and/or the lender that you choose. Often, these fees are assessed as a percentage of the loan amount. Generally, although not always, the fees and closing costs associated with a reverse mortgage are higher than those of a HELOC or home equity loan.

Disbursement

With a home equity loan, you will receive the total amount of the loan upfront as a lump-sum payment. With a HELOC, you can draw money at will during the draw period, only paying interest on the total amount that you've borrowed. And in a reverse mortgage, depending on your preference and the lender you are working with, you can receive your money as a lump sum, regular monthly income or money that can be drawn at will.

Repayment

A home equity loan has a fixed repayment schedule, where you make equal monthly payments for the term of the loan. A HELOC generally has two payment periods — a draw period where you will usually only make smaller, interest-only payments and then a repayment period where your payments are converted to amortized payments, similar to a primary mortgage loan. The most common way for a reverse mortgage to be repaid is when the borrower passes away or sells the home.

HELOC Vs. Reverse Mortgage Vs. Home Equity Loan: Which Is Best For You?

Each of these three financial products may make sense in different situations — here's a quick look at how to decide which one is best for you.

When To Choose A Reverse Mortgage

Here are some circumstances under which a reverse mortgage is a good choice:

• You are at least age 62 and living in the home
• You own your home free and clear or have a minimal mortgage balance
• If you are experiencing significant costs without a good way to pay for them
• If you don't have heirs that might inherit the home
• As part of a carefully considered estate plan

When To Choose A Home Equity Loan

Here are a few scenarios when you might choose a home equity loan:

• Desire to fund home renovations, especially ones that will increase the value of the home
• You have significant equity in your home
• You prefer to access as much of your equity upfront, in one lump sum
• You have a healthy financial profile and a good credit score

When To Choose A HELOC

A HELOC can also be a great choice, if you have circumstances such as the following:

• Desire to fund home renovations, especially ones that will increase the value of the home
• You have significant equity in your home, well under an 80% loan-to-value ratio
• You have a good credit score and a healthy financial profile
• You are comfortable with a variable interest rate and monthly payment
• You don't need all of the money up-front

The Bottom Line: Weigh Your Needs When Choosing A Reverse Mortgage, Home Equity Loan Or HELOC

If your home's value has appreciated since you first bought your home, you may be sitting on a significant amount of home equity. Using that home equity can help fund home improvements, education or other expenses. There are three different financial products that all allow you to access your home's equity — a home equity loan, a home equity line of credit (HELOC) and a reverse mortgage. While they share some similarities, there are also key differences. Study the different options to see which one might be best for you.

If you're looking to access your home's equity or improve your overall financial health, consider downloading the Rocket Money℠ app today.