{"id":53061,"date":"2021-07-26T11:36:47","date_gmt":"2021-07-26T19:36:47","guid":{"rendered":"https:\/\/www.credible.com\/blog\/?p=53061"},"modified":"2024-02-07T13:19:07","modified_gmt":"2024-02-07T21:19:07","slug":"home-equity-loan-or-heloc-vs-reverse-mortgage-how-to-choose","status":"publish","type":"post","link":"https:\/\/www.credible.com\/blog\/mortgages\/home-equity-loan-heloc-vs-reverse-mortgage\/","title":{"rendered":"Home Equity Loan or HELOC vs. Reverse Mortgage: How to Choose"},"content":{"rendered":"<p>If you\u2019re a homeowner and 62 or older, you might be weighing your options to access your home\u2019s equity. A reverse mortgage, home equity loan, or <a href=\"https:\/\/www.credible.com\/heloc\">home equity line of credit (HELOC)<\/a> could provide the cash you need for living expenses, home improvements and repairs, medical bills, or almost any other purpose.<\/p>\n<p>A reverse mortgage does not require you to make loan payments while you\u2019re alive; HELOCs and home equity loans do. But repayment is only one of several factors to consider if you\u2019re contemplating these mortgage products.<\/p>\n<p><b>Find out how each option works to determine which one best suits your needs:<\/b><\/p>\n<ul>\n<li><a href=\"#how-home-equity-loans-helocs-work\">How home equity loans and HELOCs work<\/a><\/li>\n<li><a href=\"#how-reverse-mortgages-work\">How reverse mortgages work<\/a><\/li>\n<li><a href=\"#pros-cons-home-equity-heloc\">Pros and cons of home equity loans and HELOCs<\/a><\/li>\n<li><a href=\"#pros-cons-reverse-mortgage\">Pros and cons of a reverse mortgage<\/a><\/li>\n<li><a href=\"#which-option-best-you\">Which option is right for you?<\/a><\/li>\n<li><a href=\"#another-option-cash-out-refinancing\">Another option to consider: Cash-out refinancing<\/a><\/li>\n<\/ul>\n<p><a name=\"how-home-equity-loans-helocs-work\"><\/a><\/p>\n<h2>How home equity loans and HELOCs work<\/h2>\n<p>Home equity loans and HELOCs are both <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/second-mortgages\/\">second mortgages<\/a>. With either loan, you can borrow money based on how much <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/what-is-home-equity\/\">equity<\/a> you have in your home. You\u2019ll repay the money in monthly installments.<\/p>\n<p>Since these loans are secured by your home, they have relatively low interest rates. However, second mortgages are considered riskier for lenders than first mortgages.<\/p>\n<p>As a result, you can expect HELOC and home equity rates to be one or two percentage points higher than current mortgage rates.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>What you\u2019ll need to qualify: <\/b>The <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/home-equity-loan-heloc-requirements\/\">requirements to get a home equity loan or HELOC<\/a> include a credit score in the mid-600s (or higher) and a debt-to-income ratio of 43% or less.<\/p>\n<p>You\u2019ll also need to have a good chunk of home equity \u2014 most lenders will want you to have at least 15% equity in your home.<\/div><\/div>\n<h3>Understanding home equity loans<\/h3>\n<p><a href=\"https:\/\/www.credible.com\/blog\/mortgages\/home-equity-loans\/\">Home equity loans<\/a> allow you to borrow against the value of your home and receive a lump sum at a fixed interest rate. You can repay the money over a term as long as 30 years.<\/p>\n<p>You\u2019ll have to start repaying both principal and interest within about a month of getting your loan proceeds.<\/p>\n<h3>Understanding HELOCs<\/h3>\n<p><a href=\"https:\/\/www.credible.com\/blog\/mortgages\/home-equity-line-of-credit\/\">HELOCs<\/a> allow you to borrow any amount up to an established credit limit. Instead of borrowing the money all at once, you can borrow smaller sums as you need them. In this way, HELOCs are similar to credit cards.<\/p>\n<p>Unlike a credit card, though, which allows you to borrow and repay money indefinitely, a HELOC limits borrowing to a specific draw period \u2014 generally between five to 10 years.<\/p>\n<p>Many lenders don\u2019t require borrowers to repay any principal during the draw period; instead, they only ask that you pay interest on what you\u2019ve borrowed.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>Tip: <\/b>Most HELOCs have variable interest rates, but you might be able to find a lender that offers a fixed-rate option, which can help you more easily manage your payments and potentially save you money in interest.<\/div><\/div>\n<a name=\"how-reverse-mortgages-work\"><\/a><\/p>\n<h2>How reverse mortgages work<\/h2>\n<p>A <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/reverse-mortgage-guide\/\">reverse mortgage<\/a> gives you cash to spend however you want. If you still owe money on your first mortgage, you\u2019ll have to use the reverse mortgage proceeds to pay it off, and the remaining proceeds are yours.<\/p>\n<p>However, it\u2019s not a second mortgage, and it doesn\u2019t require you to make monthly payments.<\/p>\n<p>The amount you can borrow will be higher depending on:<\/p>\n<ul>\n<li>How old you are<\/li>\n<li>How much your home is worth<\/li>\n<li>How low current interest are<\/li>\n<\/ul>\n<p>A reverse mortgage\u2019s loan balance grows over time but isn\u2019t due until you die or permanently move out of your home. Usually, the lender gets repaid by selling the home. Alternatively, the owner\u2019s heirs can repay the loan and keep the home.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\">The most common reverse mortgage \u2014 a home equity conversion mortgage (HECM) \u2014 offers payment options in one of three ways:<\/p>\n<ol>\n<li><b>Line of credit: <\/b>Similar to a HELOC, you\u2019ll borrow the amount you need and only pay interest and fees on what you borrow. Any credit you don\u2019t use in your credit line will continue to grow (up to the maximum amount of your mortgage).<\/li>\n<li><b>Fixed monthly payments: <\/b>You\u2019ll have two choices for how to receive your fixed monthly payments. \u201cTenure\u201d payments provide payments for as long as you live in your home. \u201cTerm\u201d payments provide payments for a certain number of years.<\/li>\n<li><b>Lump sum: <\/b>You\u2019ll receive all of the funds at one and pay interest and fees on the entire loan amount.<\/li>\n<\/ol>\n<\/div><\/div>\n<h3>Qualifications for a reverse mortgage<\/h3>\n<p>You must meet these qualifications to be eligible for a HECM reverse mortgage:<\/p>\n<ul>\n<li>Be at least 62 years old<\/li>\n<li>Own and occupy an eligible property type, such as single-family home, as your primary residence<\/li>\n<li>Be able to afford ongoing property charges, including homeowners insurance, property taxes, and maintenance<\/li>\n<li>Own your home mortgage-free, or have at least 50% home equity<\/li>\n<li>Complete a HUD-approved reverse mortgage counseling session<\/li>\n<li>Not be delinquent on any federal debt (such as taxes or student loans)<\/li>\n<\/ul>\n<p><a name=\"pros-cons-home-equity-heloc\"><\/a><\/p>\n<h2>Pros and cons of home equity loans and HELOCs<\/h2>\n<p>The main benefits of <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/home-equity-loan-vs-line-credit\/\">home equity loans and HELOCs<\/a> are their relatively low interest rates and the opportunity to borrow lots of money, while the main drawback is that these loans are secured by your home, potentially increasing your risk of foreclosure.<\/p>\n<h3>Pros and cons of a home equity loan<\/h3>\n\n<table id=\"tablepress-767\" class=\"tablepress tablepress-id-767 table table-border-top table-rounded table-no-img-margin table-capitalized-column-titles\">\n<thead>\n<tr class=\"row-1\">\n\t<th class=\"column-1\"><strong>Pros<\/strong><\/th><th class=\"column-2\"><strong>Cons<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody class=\"row-striping row-hover\">\n<tr class=\"row-2\">\n\t<td class=\"column-1\">Low, fixed interest rate<\/td><td class=\"column-2\">Secured by your home<\/td>\n<\/tr>\n<tr class=\"row-3\">\n\t<td class=\"column-1\">Fixed monthly payments<\/td><td class=\"column-2\">Must have good credit<\/td>\n<\/tr>\n<tr class=\"row-4\">\n\t<td class=\"column-1\">Long repayment period<\/td><td class=\"column-2\">Interest adds up over time<\/td>\n<\/tr>\n<tr class=\"row-5\">\n\t<td class=\"column-1\">Low closing costs<\/td><td class=\"column-2\">Must have enough income to qualify<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<h3>Pros and cons of a HELOC<\/h3>\n\n<table id=\"tablepress-768\" class=\"tablepress tablepress-id-768 table table-border-top table-rounded table-no-img-margin table-capitalized-column-titles\">\n<thead>\n<tr class=\"row-1\">\n\t<th class=\"column-1\"><strong>Pros<\/strong><\/th><th class=\"column-2\"><strong>Cons<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody class=\"row-striping row-hover\">\n<tr class=\"row-2\">\n\t<td class=\"column-1\">Borrow as needed over up to 10 years<\/td><td class=\"column-2\">Variable interest rate<\/td>\n<\/tr>\n<tr class=\"row-3\">\n\t<td class=\"column-1\">Fixed monthly payments<\/td><td class=\"column-2\">Not paying principal during draw period can increase borrowing costs<\/td>\n<\/tr>\n<tr class=\"row-4\">\n\t<td class=\"column-1\">Long repayment period<\/td><td class=\"column-2\">Must have good credit<\/td>\n<\/tr>\n<tr class=\"row-5\">\n\t<td class=\"column-1\">Low closing costs<\/td><td class=\"column-2\">Must have enough income to qualify<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<a name=\"pros-cons-reverse-mortgage\"><\/a><\/p>\n<p><em><strong>Read more: <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/fixed-rate-heloc\/\">Fixed-Rate HELOCs: A Cross Between HELOCs and Home Equity Loans<\/a><\/strong><\/em><\/p>\n<h2>Pros and cons of a reverse mortgage<\/h2>\n<p>A reverse mortgage loan allows seniors to access their home\u2019s value even if they can\u2019t afford monthly payments or qualify for other types of loans, but it comes with considerable costs.<\/p>\n\n<table id=\"tablepress-769\" class=\"tablepress tablepress-id-769 table table-border-top table-rounded table-no-img-margin table-capitalized-column-titles\">\n<thead>\n<tr class=\"row-1\">\n\t<th class=\"column-1\"><strong>Pros<\/strong><\/th><th class=\"column-2\"><strong>Cons<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody class=\"row-striping row-hover\">\n<tr class=\"row-2\">\n\t<td class=\"column-1\">Credit score not a factor in approval<\/td><td class=\"column-2\">High closing costs<\/td>\n<\/tr>\n<tr class=\"row-3\">\n\t<td class=\"column-1\">Income not a factor in approval<\/td><td class=\"column-2\">Harder to leave your home to heirs<\/td>\n<\/tr>\n<tr class=\"row-4\">\n\t<td class=\"column-1\">No repayment required as long as the home is your main residence<\/td><td class=\"column-2\">Mortgage insurance premiums and monthly servicing fees<\/td>\n<\/tr>\n<tr class=\"row-5\">\n\t<td class=\"column-1\">You\u2019ll never owe more than your home is worth<\/td><td class=\"column-2\">Variable interest rate on most payment options<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<a name=\"which-option-best-you\"><\/a><\/p>\n<p><em><strong>See: <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/reverse-mortgage-alternatives\/\">Reverse Mortgage Alternatives: 5 Options for Seniors<\/a><\/strong><\/em><\/p>\n<h2>Which option is right for you?<\/h2>\n<p>If you can meet a lender\u2019s income and credit requirements, <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/reverse-mortgage-alternatives\/\">reverse mortgage alternatives<\/a> like a home equity loan or HELOC will probably be better options. These loans have much lower upfront costs and are easier to understand than reverse mortgages.<\/p>\n<p><img fetchpriority=\"high\" decoding=\"async\" class=\"aligncenter wp-image-53065 size-full\" src=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/07\/Home-Equity-Loan-or-HELOC-vs.-Reverse-Mortgage-infographic.png\" alt=\"Home Equity Loan or HELOC vs. Reverse Mortgage infographic\" width=\"901\" height=\"900\" srcset=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/07\/Home-Equity-Loan-or-HELOC-vs.-Reverse-Mortgage-infographic.png 901w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/07\/Home-Equity-Loan-or-HELOC-vs.-Reverse-Mortgage-infographic-600x600.png 600w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/07\/Home-Equity-Loan-or-HELOC-vs.-Reverse-Mortgage-infographic-200x200.png 200w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/07\/Home-Equity-Loan-or-HELOC-vs.-Reverse-Mortgage-infographic-768x767.png 768w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/07\/Home-Equity-Loan-or-HELOC-vs.-Reverse-Mortgage-infographic-300x300.png 300w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/07\/Home-Equity-Loan-or-HELOC-vs.-Reverse-Mortgage-infographic-150x150.png 150w\" sizes=\"(max-width: 901px) 100vw, 901px\" \/><\/p>\n\n<table id=\"tablepress-770\" class=\"tablepress tablepress-id-770 table table-border-top table-rounded table-no-img-margin table-capitalized-column-titles\">\n<thead>\n<tr class=\"row-1\">\n\t<td class=\"column-1\"><\/td><th class=\"column-2\"><strong>Home equity loan<\/strong><\/th><th class=\"column-3\"><strong>HELOC<\/strong><\/th><th class=\"column-4\"><strong>Reverse mortgage<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody class=\"row-striping row-hover\">\n<tr class=\"row-2\">\n\t<td class=\"column-1\"><strong>Min. borrower age<\/strong><\/td><td class=\"column-2\">18 in most states<\/td><td class=\"column-3\">18 in most states<\/td><td class=\"column-4\">62<\/td>\n<\/tr>\n<tr class=\"row-3\">\n\t<td class=\"column-1\"><strong>Fund access<\/strong><\/td><td class=\"column-2\">Lump sum<\/td><td class=\"column-3\">As needed<\/td><td class=\"column-4\">Lump sum, as needed, or monthly<\/td>\n<\/tr>\n<tr class=\"row-4\">\n\t<td class=\"column-1\"><strong>Interest rate<\/strong><\/td><td class=\"column-2\">Fixed<\/td><td class=\"column-3\">Usually variable but can be fixed<\/td><td class=\"column-4\">Usually variable but can be fixed<\/td>\n<\/tr>\n<tr class=\"row-5\">\n\t<td class=\"column-1\"><strong>Required monthly payments<\/strong><\/td><td class=\"column-2\">Principal and interest<\/td><td class=\"column-3\">Interest only during draw period; principal and interest during repayment period<\/td><td class=\"column-4\">None<\/td>\n<\/tr>\n<tr class=\"row-6\">\n\t<td class=\"column-1\"><strong>Min. credit score<\/strong><\/td><td class=\"column-2\">Mid-600s<\/td><td class=\"column-3\">Mid-600s<\/td><td class=\"column-4\">None<\/td>\n<\/tr>\n<tr class=\"row-7\">\n\t<td class=\"column-1\"><strong>Equity required<\/strong><\/td><td class=\"column-2\">More than 20%<\/td><td class=\"column-3\">More than 20%<\/td><td class=\"column-4\">More than 50%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<h3>When to consider a home equity loan<\/h3>\n<ul>\n<li>You can meet credit and income requirements<\/li>\n<li>You want predictable monthly payments<\/li>\n<li>You need a lump sum for a specific purpose<\/li>\n<li>You want to leave your home to your heirs<\/li>\n<\/ul>\n<h3>When to consider a HELOC<\/h3>\n<ul>\n<li>You can meet credit and income requirements<\/li>\n<li>You want the flexibility to decide when to borrow and how much<\/li>\n<li>You want to make interest-only payments for the first several years of the loan<\/li>\n<li>You\u2019re comfortable with a variable interest rate<\/li>\n<li>You want to leave your home to your heirs<\/li>\n<\/ul>\n<h3>When to consider a reverse mortgage<\/h3>\n<ul>\n<li>Your home equity is your biggest asset<\/li>\n<li>You want to age in place<\/li>\n<li>You have poor credit<\/li>\n<li>You don\u2019t want to make monthly payments<\/li>\n<li>You\u2019re an older retiree<\/li>\n<li>You\u2019re okay with the lender selling your home to repay the loan once you move out or pass away<\/li>\n<\/ul>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>Tip: <\/b>Even if you\u2019re retired, you may still qualify for a second mortgage based on your retirement income from sources such as Social Security, annuities, a pension, or your retirement accounts.<\/div><\/div>\n<a name=\"another-option-cash-out-refinancing\"><\/a><\/p>\n<h2>Another option to consider: Cash-out refinancing<\/h2>\n<p>Older homeowners might be interested in <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/cash-out-refinancing\/\">cash-out refinancing<\/a> as an alternative means of tapping home equity.<\/p>\n<p>With a cash-out refinance, you take out a new first mortgage that\u2019s larger than the balance on your existing mortgage. The proceeds from your new loan pay off your existing mortgage and your closing costs. You then get to keep the rest of the money to use however you want.<\/p>\n<p>A cash-out refinance can be a good option when prevailing mortgage rates are lower than the rate you\u2019re currently paying, you have good credit, and you\u2019re capable of affording the new monthly mortgage payments.<\/p>\n<p>Credible can help you get started with your cash-out <a href=\"https:\/\/www.credible.com\/mortgage-refinance\">refinance<\/a>. <a href=\"https:\/\/www.credible.com\/mortgage\/refinance\/rates\/cash-out-refinance\">Checking refinance rates<\/a> on our platform is simple and only takes a few minutes \u2014 and it won\u2019t impact your credit score.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><span style=\"font-size: x-large;\"><strong>Get the cash you need and the rate you deserve<\/strong><\/span><\/p>\n<ul class=\"list--iconArrow accent--isGreen\">\n<li>Compare lenders<\/li>\n<li>Get cash out to pay off high-interest debt<\/li>\n<li>Prequalify in just 3 minutes<\/li>\n<\/ul>\n<p style=\"text-align: center;\"><a class=\"btn btn-warning\" href=\"https:\/\/www.credible.com\/mortgage-refinance\/signup\">Find My Loan<\/a><br \/>\n<small>No annoying calls or emails from lenders!<\/small><\/p>\n<p><!-- TrustBox widget - Micro Combo --><\/p>\n<div class=\"trustpilot-widget\" data-locale=\"en-US\" data-template-id=\"5419b6ffb0d04a076446a9af\" data-businessunit-id=\"5536ec090000ff00057eebe7\" data-style-height=\"20px\" data-style-width=\"100%\" data-theme=\"light\"><a href=\"https:\/\/www.trustpilot.com\/review\/www.credible.com\" target=\"_blank\" rel=\"noopener noreferrer\">Trustpilot<\/a><\/div>\n<p><!-- End TrustBox widget --><\/p>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>If you\u2019re a homeowner and 62 or older, you might be weighing your options to access your home\u2019s equity. A reverse mortgage, home equity loan, or home equity line of credit (HELOC) could provide the&hellip; <a class=\"more \" href=\"https:\/\/www.credible.com\/blog\/mortgages\/home-equity-loan-heloc-vs-reverse-mortgage\/\">Continue reading<\/a><\/p>\n","protected":false},"author":106,"featured_media":53062,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"inline_featured_image":false,"footnotes":""},"categories":[1463],"tags":[1520,1528],"class_list":["post-53061","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mortgages","tag-home-equity","tag-mortgage-rates-sidebar-no-table","home-equity-loan-or-heloc-vs-reverse-mortgage-how-to-choose","post_tag-home-equity","post_tag-mortgage-rates-sidebar-no-table"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Home Equity Loan or HELOC vs. Reverse Mortgage: How to Choose - Credible<\/title>\n<meta name=\"description\" content=\"A reverse mortgage, home equity loan, or HELOC could help fund your retirement expenses, home repairs, medical bills, or other expenses. 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