A home is often the biggest investment you’ll make, and over time, its value tends to rise, which is why tapping into home equity is a popular lending option. The difference between your home’s current market value and what you still owe on your mortgage is called equity and, as you pay down your mortgage, your equity grows and there are ways to access that money when needed.
Two common options are a Home Equity Line of Credit (HELOC) and a reverse mortgage. Choosing between them depends on your financial situation and goals so let’s dive in and explore both options.
How Using a HELOC To Access Home Equity Works
A HELOC lets you borrow against your home’s equity as needed. It works like a credit card—you can withdraw funds up to a set limit and only pay interest on what you use. This option is best if you need flexible access to cash and can manage the added monthly payments easily. However, approval depends on your income and credit score, making it less accessible for retirees who aren’t in the workforce any longer.
How Does a Reverse Mortgage Tap Into Your Home Equity?
A reverse mortgage is designed for homeowners aged 55 and older who want to tap into their home’s equity without making monthly payments. Instead, the loan is repaid when the home is sold or the owner moves out. It’s an option for retirees looking to supplement their income without selling their home, but the interest builds over time, reducing the equity available to pass on in your estate which is something to keep in mind.
Which Is The Right Option To Access Your Home Equity?
Both options have pros and cons, so it’s important to understand the long-term impact of your decision before making it. If you’re considering either, speaking with an experienced mortgage broker, like myself, can help you make the best choice for your needs. Below are some of the key differences between reverse mortgages and HELOCs you should be aware of.
The Structure of the Loan
- Reverse Mortgage: Provides a lump sum, regular payments, or a combination of both, with no required monthly payments.
- HELOC: Functions as a line of credit, allowing you to borrow as needed up to a predetermined limit. Regular payments on interest and principal are required.
How You Repay The Loan
- Reverse Mortgage: The loan is repaid when the homeowner sells the property, moves out, or passes away.
- HELOC: Requires monthly payments during the draw period and possibly a repayment period afterward.
Interest Rates and Admin Fees
- Reverse Mortgage: Typically has higher interest rates and admin fees compared to traditional mortgages.
- HELOC: Often offers lower interest rates, but these can be variable and fluctuate over time.
The Impact on Homeownership
- Reverse Mortgage: You retain full ownership of your home.
- HELOC: You retain full ownership, but must adhere to regular payment schedules.
Eligibility Requirements
- Reverse Mortgage: Requires homeowners to be at least 55 years old and have home equity.
- HELOC: Requires a good credit score and sufficient income to cover the payments.
When to Choose a HELOC
A HELOC might work better if you need frequent access to funds, aren’t sure how much money you’ll need, and prefer flexibility without fixed repayment schedules. With a HELOC, you can borrow up to 65% of your home’s value at lower interest rates, but you’ll need good credit and income to qualify.
When to Choose a Reverse Mortgage
Consider a reverse mortgage if you are over 55 with significant home equity but limited cash or if you need to supplement your retirement income and want to stay in your home while accessing equity. Reverse mortgages let you borrow up to 59% of your home’s value. They don’t require monthly payments or income verification, and the money isn’t taxable. However, interest rates are typically higher, and fees apply.
Why Seniors Often Prefer Reverse Mortgages
Many seniors choose reverse mortgages despite higher interest rates because:
- They may have limited income, making it hard to qualify for HELOCs
- No monthly payments are required with reverse mortgages
- Qualification depends on home equity, not income
- The loan doesn’t come due until you sell, move, or pass away
The amount you can borrow depends on your age (older borrowers typically qualify for more), location, property type, and number of residents. At 55, you might access 15-20% of your home’s value, while those 80+ can access the maximum amount.
A Risk Comparison Between HELOC and Reverse Mortgages
HELOCs carry more risk because if you miss payments, the lender can foreclose on your home. With reverse mortgages, there are no monthly payments to miss, though you must keep up with property taxes and insurance.
The main reverse mortgage risk is that compounding interest reduces your equity over time. If you need to sell and move to a long-term care facility, you might have little equity remaining to cover that cost, especially if property values decline.
Before choosing either option, carefully consider your financial situation, plans, and how long you intend to stay in your home. Both options have their place, but what works best depends on your specific needs.
Still Not Sure About Which One Works Best For You? As a Mortgage Broker, I Can Offer You The Professional Advice You Need To Make A Sound Decision
Tapping into your home equity is a big decision and one you shouldn’t make lightly or alone. Both of these options have risks and advantages, so consulting with an experienced mortgage broker, like me, and possibly your financial planner if applicable as well, can help you assess your financial situation and make the right choice.
If you have questions or are interested in moving ahead with either option, reach out to me today and let’s get started on a financial plan to decide which approach to take. Book a free consultation with me online or call me at 705-315-0516.