Evaluating HELOCs vs. Home Equity Loans vs. Reverse Mortgages
Home Equity Line of Credit vs Home Equity Loan vs Reverse Mortgage: What to Consider
When it comes to taking equity out of your home, there are several options available. Two of the most popular are a home equity line of credit (HELOC) and home equity loan. But there’s also a third option: the reverse mortgage.
So, which is the best choice for you? It depends on several factors.
In this article, we’ll take a look at:
What a HELOC, home equity loan, and reverse mortgage are and how they work
The pros and cons of each option
What to consider before taking out any type of home equity loan
By the end of this article, you should have a better idea of which option is best for your needs.
What Is a Home Equity Line of Credit (HELOC)?
A home equity line of credit is a type of loan that allows you to borrow against the equity in your home.
With a HELOC, you can borrow as much or as little as you need, up to your credit limit. You only pay interest on the money you borrow, and you can use the funds for any purpose.
HELOCs typically have a variable interest rate, which means your monthly payments can go up or down over time. They also usually have a draw period, which is the period of time when you can borrow money.
At the end of the draw period, you’ll enter the repayment period, during which you’ll need to pay back the money you borrowed, plus interest.
What Is a Home Equity Loan?
A home equity loan is a type of loan that allows you to borrow against the equity in your home.
With a home equity loan, you borrow a lump sum of money and make fixed monthly payments over a set period of time. Home equity loans typically have a fixed interest rate, which means your monthly payments will stay the same for the duration of the loan.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows seniors to borrow against the equity in their homes.
Unlike a HELOC or home equity loan, a reverse mortgage doesn’t require monthly payments. Instead, the loan is repaid when the borrower dies, moves out of the home, or sells the home.
Reverse mortgages typically have a higher interest rate than HELOCs and home equity loans.
HELOC vs Home Equity Loan vs Reverse Mortgage: Pros and Cons
Now that you know a little more about HELOCs, home equity loans, and reverse mortgages, let’s take a look at the pros and cons of each option.
HELOC
Pros:
You can borrow as much or as little as you need, up to your credit limit.
You only pay interest on the money you borrow.
You can use the funds for any purpose.
Cons:
Your interest rate is typically variable, which means your monthly payments can go up or down over time.
You’ll need to make monthly payments during the repayment period.
Home Equity Loan
Pros:
You can borrow a lump sum of money.
Your interest rate is typically fixed, which means your monthly payments will stay the same for the duration of the loan.
You can use the funds for any purpose.
Cons:
You’ll need to make monthly payments during the repayment period.
Reverse Mortgage
Pros:
You don’t have to make monthly payments.
You can use the funds for any purpose.
Cons:
Your interest rate is typically higher than with a HELOC or home equity loan.
The loan is due when the borrower dies, moves out of the home, or sells the home.
What to Consider Before Taking Out Any Type of Home Equity Loan
Before taking out a HELOC, home equity loan, or reverse mortgage, there are a few things you should consider.
First, think about why you need the money and how you plan to use it.
Do you need a lump sum of cash for a one-time expense, like a home renovation? If so, a home equity loan might be the best option.
Do you need ongoing access to cash? If so, a HELOC might be the best option.
Do you want to avoid making monthly payments? If so, a reverse mortgage might be the best option.
Second, consider the interest rate and fees.
HELOCs and home equity loans typically have lower interest rates than credit cards and personal loans. But it’s important to compare rates and fees from different lenders to make sure you’re getting the best deal.
Reverse mortgages typically have higher interest rates than HELOCs and home equity loans. But remember, you don’t have to make monthly payments with a reverse mortgage, so the total cost of the loan may be lower than with a HELOC or home equity loan.
Finally, consider the impact on your home equity and your ability to sell or borrow against your home in the future.
Taking out a home equity loan will reduce the equity you have in your home. And if you take out a reverse mortgage, you may not have any equity left in your home when the loan is due.
If you’re considering a HELOC, home equity loan, or reverse mortgage, talk to a financial advisor to help you understand the pros and cons and decide which option is best for you.
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