Reverse Mortgage vs. Home Equity Line of Credit

When you need money and already have thousands of dollars invested in your home, there are options available to you. Among these are reverse mortgages and home equity lines of credit. Although the differences can be subtle and confusing, they are extremely important in making the decision about which one is best for you. Here’s a look at how the two relate to each other.

Reverse Mortgage: What is it?

A reverse mortgage is roughly what it sounds like. The money you have put into your home over the years will be paid back to you, although generally from a different company. It’s a specific type of loan for homeowners with a considerable amount of equity under their belts.

Generally, rather than a lump sum, many people who take out a reverse mortgage choose to receive monthly payments. It can be a good way to supplement your income. Reverse mortgage recipients do pay back the loan eventually but not until they sell the property or are unable to live in the home.

Who chooses it?

Reverse mortgages are intended for older Americans—specifically those at least 62 years of age. Basically, it can be a great way to have a little more to live on than just your retirement income.

Since traditional mortgages last several decades, a majority of older Americans have the bulk of their investments in their home. Instead of selling it and having to find a different home, a reverse mortgage can give seniors the best of both worlds: the money that comes from selling a home while still maintaining a lifestyle to which they have become accustomed.

Home Equity Line of Credit: What is it?

Also called “HELOC” in banking language, a home equity line of credit is very similar to a reverse mortgage. In fact, a reverse mortgage can be given as a line of credit rather than monthly payments. Again, the home stands as equity, providing a rough estimate of how much money the homeowner can expect to draw on.

Think of your home as a credit card worth $100,000. When you arrange for a home equity line of credit, you can use up to $100,000, but you don’t have to use all of it. This makes it easier to pay back, but it still allows you the financial freedom you are wanting. You use it when you need it, but you won’t face the burden of having to pay back the entire amount or the interest generated by using that much money.

Who chooses it?

Different banks and lenders offer HELOCs to different people. Ultimately, the biggest difference is that you don’t necessarily have to be over 62 years of age. Some banks only offer HELOCs to homes on which they hold or previously held a mortgage. Other lenders may be more generous. Candidates almost always need to have good credit, a low debt ratio, and home equity.

Usually, lenders require that you owe less than the current value of the home. This translates into having paid off a certain percentage of your first mortgage. Because lines of credit are usually only about 75% of the equity, they may not be helpful if you own a less expensive home without a significant portion of equity. If you have high-interest debts or finance home renovations, you can use HELOCs to combine debt.