Reverse Mortgage vs. Home Equity Loan for Retirement Funds

If you’re considering tapping into your home’s equity to access funds for retirement, you might be wondering which would be a better option – a Home Equity loan or a reverse mortgage.

Reverse mortgages and home equity loans can give you access to your equity without selling your home, but the loans have different repayment terms. 

How Home Equity loans work

With home equity loans and lines of credit (HELOCs), you borrow against the equity in your home and repay the loan in monthly payments, just like a traditional mortgage. The lender will place a lien on your home as collateral until the loan is paid off.

How Reverse Mortgages work

While there are different types of reverse mortgages, with a Home Equity Conversion Mortgage (HECM) reverse mortgage that's insured by the FHA, you can access a portion of your home’s equity but do not make monthly payments like a traditional loan. Instead, the homeowner has the flexibility to receive the funds from the loan – monthly, as a lump sum, or as a line of credit.

Homeowners must repay the loan, including all accrued interest and fees, when they sell the house or the homeowner passes. It’s also important to understand, as part of the terms of the loan, you are still responsible for paying property taxes, homeowner’s insurance, HOA dues, and maintaining the home. If the homeowner does not continue to meet the terms of the loan, foreclosure could be a risk.

Comparing Reverse Mortgages and Home Equity loans 

Structure of loans and repayment

• The age to be eligible for a reverse mortgage is typically 62+ (some types of reverse mortgages are available at age 55). Home equity loans have no age limit.
  
  
• With a reverse mortgage, there are no monthly payments. Home equity loans require regular monthly payments.
  
  
• HECM reverse mortgages are insured by the FHA (other types of reverse mortgages from private lenders may not be insured). In addition, HECMs are non-recourse loans so when the home is sold and the reverse mortgage is repaid, the borrower (or estate) will not owe more than the home's value.

Costs and fees

• Both loan options come with costs and fees, which may include closing costs, origination fees, appraisal fees, and servicing fees.
• It’s important to compare the costs of each type of loan when deciding which one is right for you.

When it comes to funding your retirement, both reverse mortgages and home equity loans can give you access to your equity without selling your home. Consulting with a reverse mortgage specialist can help you decide which type of loan and repayment option is the best fit for your needs and goals.

This information is not from HUD or FHA and was not approved by HUD or a government agency. You are required to maintain the home, pay property tax, HOA fees, and homeowners insurance. Consult your professional tax advisor.