Compare Reverse Mortgage Vs Home Equity Loan in (May) 2022

Hey Sunshine,

Here is everything you need to know about the Reverse Mortgage vs Home Equity Loan and which one you should opt for to get maximum benefits.

The popularity of reverse mortgages has grown over the years, with the number of seniors taking advantage of the many benefits that reverse mortgages offer. However, plenty of people aren’t sure what a reverse mortgage is or if it’s right for them.

Moreover, many don’t know how home equity loans differ from reverse mortgages or other options such as traditional home equity loans and lines of credit. Here we will take a close look at these financial terms to help you make an informed decision.

Reverse Mortgage Vs Home Equity Loan: Overview

Both home equity loans and reverse mortgages enable homeowners to borrow money against their houses, but they are designed for different uses. While a home equity loan is an unsecured loan that uses your house as collateral, a reverse mortgage is backed by your house and life insurance policy.

For example, if you receive $100,000 from a reverse mortgage today, you will have to pay that amount back when you sell or leave your home. If that same money came from a traditional home equity loan instead, it would not have to be paid back until after you died or moved out of your house. When deciding between these two financial instruments, it’s essential to understand Reverse Mortgage Vs Home Equity Loan: how they differ to decide which option is best for your situation.

Reverse Mortgage: Definition

A reverse mortgage is essentially a loan for seniors with low or no income. You typically don’t need to make payments on these loans, but you do have to pay a one-time mortgage insurance premium when you sign up and an origination fee at closing.

Reverse Mortgage - Definition
Reverse Mortgage Definition

Depending on where you live, these fees can total several thousand dollars. While reverse mortgages are growing more prevalent among older Americans each year, they also come with serious caveats.

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Understanding Home Equity Loan

As noted, reverse mortgages are big loans that you must repay, whereas home equity loans let you borrow money against your home’s value. They tend to come with lower interest rates than reverse mortgages and are generally much easier to qualify for.

Home Equity Loan Definition
Home Equity Loan Definition

You can use home equity loans for almost anything; homeowners typically use them to pay off high-interest debt or finance significant projects like renovations or landscaping. Whatever you do, be sure to factor your loan into your future financial planning—your house will still be paid off when you die if you don’t take out any additional loans!

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Difference Between Reverse Mortgage and HELOC

HELOC vs reverse mortgage is the question that many people will be considering over their lifetimes, particularly since these mortgages don’t tend to get much publicity until it’s too late. The primary difference between a reverse mortgage and HELOC(Home Equity Line Of Credit) is that in the case of the former, instead of you paying the lender, the mortgage lender pays you which is then repaid by selling the house. After selling the house, if there is any extra money left, that will be handed to the owner or the heirs of the owner.

HELOC similarly gives you a loan on the line of credit for which you have to pay varying degrees of interest. Although it seems more like a credit card, it actually uses your house as the collateral in case you are not able to pay back the loan. Therefore, for HELOC, you actually have to return the money, whereas, in a reverse mortgage, you do not have to pay back the single lump-sum loan.

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Reverse Mortgage Vs Home Equity Loan Vs HELOC: Which One To Choose?

When choosing between options, a reverse mortgage is very different from a home equity loan or line of credit. Reverse mortgages are federally insured loans that allow older homeowners to use their homes as ATMs, allowing them to withdraw money against their home’s value without selling their house.

HELOC Vs Reverse Mortgage Vs Home Equity Loan
HELOC Vs Reverse Mortgage Vs Home Equity Loan

The funds can be used for any purpose, including paying off debts, spending on vacations, or helping with other expenses. In some cases, if they owe more than their home is worth after taking out a reverse mortgage loan, they will not have to pay back what they owe. There are no income limits for reverse mortgages. Most importantly, you do not need to have paid off your mortgage or have excellent credit as you do with a HELOC or equity loan.

All of these options have their own setbacks and benefits. For instance, if a couple takes the reverse mortgage, the lender cannot sell the house until both of them dies which can be an issue for the living spouse in regard to problems such as moving or repairing the house. On the other hand, HELOC and home equity loans let you have your home as an important asset if you can pay them back. Also, whereas reverse mortgage and home equity loans pay you lump-sum money, HELOC provides on the need-basis according to a credit limit.

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Conclusion

Whereas for a reverse mortgage you have to be at least 62 years old, for the home equity loans, there is no age limit. Both of these have their positive and negative points. It’s up to you to decide which way to go based on your needs and wish. When determining whether or not to apply for either a reverse mortgage or home equity loan, you should consider not only your financial benefits but also what are the future plans in regard to your house.

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