Deciding Between Reverse Mortgages vs. HELOCs vs. Second Mortgages
What's the Difference Between a Reverse Mortgage, a Home Equity Loan, and a Home Equity Line of Credit?
If you're a senior citizen with substantial home equity, you may be wondering whether to get a reverse mortgage, a home equity loan, or a home equity line of credit (HELOC). Here's a rundown of each option and some considerations to help you decide which is best for you.
A reverse mortgage is a loan that allows you to tap into your home equity and receive monthly payments. The loan doesn't have to be repaid until you die or sell your home.
A home equity loan is a lump-sum loan with fixed payments. You repay the loan over a set period of time, usually 5 to 15 years.
A HELOC is a line of credit that you can tap into as needed. You only make payments on the portion of the line of credit that you use, and you can use it over and over again up to the limit. The repayment period is usually 10 to 20 years.
Considerations
There are several things to consider when deciding which type of loan is right for you.
How much money do you need? If you only need a small amount of money, a home equity loan or HELOC may be a better option than a reverse mortgage.
How long do you need the money? If you need the money for a short period of time, a home equity loan or HELOC may be a better option. With a reverse mortgage, you don't have to repay the loan until you die or sell your home, so it may be a good choice if you need money for a long-term expense, such as home repairs or medical bills.
How much can you afford to pay each month? With a reverse mortgage, you don't have to make any monthly payments, so it may be a good option if you're on a fixed income. With a home equity loan or HELOC, you'll need to make monthly payments, so make sure you can afford the payments before taking out the loan.
What are the fees? All types of home equity loans come with fees, so be sure to compare the fees before you decide which loan is right for you.
What are the interest rates? Interest rates on home equity loans are typically lower than credit card rates or personal loan rates. However, the interest rate on a reverse mortgage is usually higher than the rate on a home equity loan.
What are the tax implications? Interest on home equity loans and HELOCs is typically tax-deductible. Interest on reverse mortgages is not tax-deductible.
Be sure to consult with a financial advisor to determine which type of loan is right for you.
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