What’s the Difference Between a HELOC and a Reverse Mortgage?
If you’re a homeowner, you may be able to tap into your home equity to borrow money. But there are several different ways to do that, each with its own pros and cons.
Two of the most popular options are home equity lines of credit (HELOCs) and reverse mortgages. Both can be a good fit depending on your financial needs and goals.
Here’s a look at how HELOCs and reverse mortgages work, and how to decide which one might be right for you.
How HELOCs work
A HELOC is a type of home equity loan that allows you to borrow against the equity in your home. Equity is the portion of your home’s value that you own outright, and it’s the difference between your home’s current market value and the amount you still owe on your mortgage.
With a HELOC, you can borrow as much or as little as you need, up to your credit limit, and you only have to pay interest on the amount you borrow.
For example, let’s say your home is worth $300,000 and you owe $200,000 on your mortgage. That means you have $100,000 in home equity. If you get a HELOC for $50,000, you’ll still have $50,000 in equity left in your home.
HELOCs typically have a 10-year draw period, during which you can borrow against your line of credit as needed. After that, you’ll enter the repayment period, and you’ll typically have 20 years to repay the loan.
HELOCs typically have adjustable interest rates, which means the rate can go up or down over time. That means your monthly payments could change, too.
How reverse mortgages work
A reverse mortgage is a type of loan that allows you to borrow against your home equity and access the cash you’ve built up over time.
With a reverse mortgage, you don’t have to make monthly payments. Instead, the loan is due when you sell your home or die.
Reverse mortgages are only available to homeowners age 62 and older. And if you have a federal housing administration (FHA) loan, you must get a HECM (Home Equity Conversion Mortgage) – the only type of reverse mortgage insured by the FHA.
With a reverse mortgage, you can borrow as much or as little as you need, up to your loan limit. The amount you can borrow depends on your age, the equity in your home, and the interest rate.
For example, let’s say you’re 70 years old and you have a home worth $300,000 with $100,000 in equity. If you get a reverse mortgage for $50,000, you’ll still have $50,000 in equity left in your home.
Reverse mortgages typically have fixed interest rates, which means your rate will stay the same for the life of the loan. That can make it easier to budget for your monthly expenses.
HELOC vs. reverse mortgage: Which is right for you?
Now that you know how HELOCs and reverse mortgages work, you can decide which one might be right for you.
If you need access to cash for a short-term financial need, a HELOC might be a good option. That’s because you can borrow as much or as little as you need, up to your credit limit, and you only have to pay interest on the amount you borrow.
If you need a steady stream of income in retirement, a reverse mortgage might be a good option. That’s because you can access the equity in your home without having to make monthly payments.
No matter which option you choose, be sure to compare offers from multiple lenders to get the best deal.