Reverse Mortgage vs Home Equity Loan in California

Quick Comparison: Reverse Mortgage vs Home Equity Loan

The table below lines up the two options on the points where they differ most.

The table summarizes general features. Individual terms vary by lender and by loan.

How a Reverse Mortgage Actually Works

A reverse mortgage is a loan against the home's equity that does not require monthly mortgage payments while the borrower lives there. California law describes it as a nonrecourse loan that "requires no payment of principal or interest until the entire loan becomes due and payable" (Civil Code section 1923). Nonrecourse means the lender can look only to the home for repayment, not to the borrower's other assets.

The most common type is the HECM, short for Home Equity Conversion Mortgage. A HECM is insured by the Federal Housing Administration under 12 U.S.C. § 1715z-20. HUD says the HECM "is only available through a Federal Housing Administration (FHA)-approved lender."

Age is the first gate. Under 12 U.S.C. § 1715z-20(b)(1), an eligible homeowner is one "who is, or whose spouse is, at least 62 years of age or such higher age as the Secretary may prescribe." The HUD regulation at 24 C.F.R. § 206.33 adds that "the youngest borrower shall be 62 years of age or older at the time of loan closing." California homeowners may also meet proprietary reverse mortgages. These are reverse mortgages that are not HECMs and are not federally insured. Their minimum age and other terms are set by the lender, so they can differ from the HECM rules.

How much may be available depends on several factors. HUD lists factors including the age of the youngest borrower or eligible non-borrowing spouse, and the lesser of the appraised value, the HECM FHA mortgage limit or the sales price.

How money is paid out. For a HECM, the statute lets the borrower choose among several payment methods. The money can come as a line of credit. It can come as monthly payments over a term the borrower picks, or as monthly payments over a chosen term combined with a line of credit. It can come as monthly payments "over the tenure of the mortgagor," meaning for as long as the borrower keeps the loan under its terms, or as those payments combined with a line of credit. Finally, it can come "on any other basis that the Secretary considers appropriate." Each method is subject to the lender's approval, the loan's terms and the borrower's obligations (12 U.S.C. § 1715z-20(d)(9)).

What the borrower keeps doing. The CFPB states that "the title to your home remains in your name." It also states that homeowners "are required to pay property taxes and homeowners insurance, use the property as their principal residence, and keep their house in good condition." A principal residence is the home where the borrower lives for the majority of the year.

How the balance grows. "Interest and fees are added to the loan balance each month and the balance grows," the CFPB says. HUD's Mortgagee Letter 2017-12 set the mortgage insurance charges for HECMs with FHA case numbers assigned on or after October 2, 2017. It set an initial charge of 2.00% of the maximum claim amount and an annual charge of 0.50% of the outstanding balance. Federal rules also limit the origination fee, which is the lender's charge for making the loan. That fee may be fully financed with the mortgage, and the lender discloses it. The CFPB notes that a reverse mortgage "is more expensive than other home loans." For a closer look at this, see reverse mortgage loan balance growth.

When it ends. A HECM must be paid off when the last surviving borrower or eligible non-borrowing spouse dies, sells the home or no longer lives in it as a principal residence. It can come due sooner if taxes, insurance or repairs fall behind. Under 24 C.F.R. § 206.27(c), it can also come due, with HUD's approval, if a borrower is away because of illness "for a period of longer than 12 consecutive months" and no other borrower lives in the home. California's statute, Civil Code section 1923.2(f), lists four events that can make a reverse mortgage due:

• the home is sold or title is otherwise transferred;
• all borrowers stop living there as a principal residence, subject to the absence rules described later on this page;
• an agreed fixed maturity date arrives; or
• an event named in the loan documents occurs that "jeopardizes the lender's security."

What a Home Equity Loan and HELOC Are and How They Work

A home equity loan starts from a simpler idea: borrow a set amount now and pay it back over time. The CFPB calls it "a specific amount of money borrowed against the equity of your home," received "in a lump sum payment," with "a fixed or adjustable interest rate." If the home still carries a mortgage, a home equity loan is a second mortgage, to be paid in addition to the first.

A HELOC is different. It is a revolving line of credit, which means a homeowner can draw money, repay it, and draw again, up to a set limit. The CFPB says HELOCs "usually have adjustable interest rates and the payment will vary depending on the outstanding balance." The FTC explains that a HELOC has two stages. During the first stage, the "draw period," a borrower "may only have to pay the interest on money you borrowed." During the second stage, the repayment period, "you can't borrow any more money." The CFPB adds that a lender may freeze or reduce a line if the home's value drops significantly or the borrower's finances change.

Both loans are a way to pay for something now. Common uses include repairs, medical bills or paying off other debts. The CFPB suggests talking with a nonprofit credit counselor before using a home equity loan to consolidate debts.

The key difference from a reverse mortgage is the monthly payment. A home equity loan lender looks at whether the borrower can repay, which typically means a review of income, credit and equity. Age plays no special role. The CFPB says plainly to "only consider a HELOC if you're confident you can keep up with the loan payments."

The home is collateral, meaning it secures the debt. The FTC states that "if you don't repay the outstanding balance, the lender can take your home as payment for your debt." For a longer look at these two loans, there is a guide to the HELOC vs home equity loan choice for retirees.

California Rules That Apply to Each Option

California adds steps before a reverse mortgage can begin. These rules are meant to give a homeowner time to think, and an independent person to talk with, before signing.

Counseling first. Federal law requires HECM borrowers to receive counseling from an independent third party that is not paid by the lender or by anyone selling annuities or insurance (12 U.S.C. § 1715z-20(d)(2)(B)). The counselor must discuss several topics, including options other than a HECM and the HECM's financial implications. The counselor must also disclose that a HECM "may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs."

California's rules apply to reverse mortgages generally. Under Civil Code section 1923.2(j), the lender must give the borrower a list of "not fewer than 10 counseling agencies" approved by HUD. HUD's counselor roster can be searched online, or reached by calling (800) 569-4287, as HUD's HECM page states.

A seven-day pause. Under Civil Code section 1923.2(k), a lender "shall not accept a final and complete application" or charge fees "until the lapse of seven days from the date of counseling." The applicant must also certify that the counseling took place. The certification must show that the counseling was in person, unless the applicant chose another format.

Notices in writing. Civil Code section 1923.5 requires the lender to give a large-print notice before counseling. The notice begins: "A REVERSE MORTGAGE IS A COMPLEX FINANCIAL TRANSACTION." The lender or counseling agency must also provide a state worksheet guide titled "Is a Reverse Mortgage Right for Me?"

Other protections. Section 1923.2 allows prepayment, which means paying the loan off early, "without penalty at any time." It also bars a lender from requiring the borrower to buy an annuity. California's definition requires that the lender be "licensed or chartered" under state or federal law (Civil Code section 1923).

For home equity loans and HELOCs. The FTC explains that the three-day rule lets a borrower cancel "within three business days for any reason and without penalty if you're using your main residence as collateral." This is called the right of rescission. The FTC adds that it "does not apply to a vacation or second home." The FTC says most reverse mortgages carry a similar right to cancel within three business days after closing.

When a Reverse Mortgage Usually Fits — and When It Does Not

Picture a widow in Riverside County, living on Social Security in a house she paid off years ago. Her question is not about growth or interest rates. It is whether she can stay where she is. That is the kind of situation a reverse mortgage was built for. The statute's stated purpose is to help older homeowners facing costs "at a time of reduced income" (12 U.S.C. § 1715z-20(a)).

A reverse mortgage tends to fit when several conditions line up:

• Age. The youngest borrower is 62 or older for a HECM, or meets a proprietary lender's age rule.
• Staying put. The homeowner plans to stay in the home for years.
• Tight income. Monthly income leaves little room for a new loan payment.
• An existing payment. The goal is to replace an existing mortgage payment or to add to fixed income.
• Heirs. Leaving the home's full equity to heirs is not the main aim.

It tends not to fit in other situations:

• A move ahead. A move is likely within a few years. Up-front costs weigh more heavily on a short loan.
• Preserving equity. Keeping as much equity as possible is the priority. The FTC warns that rising interest "can use up much – or even all ─ of your equity," and the longer the loan runs, the more it adds up.
• Ongoing costs. Keeping up property taxes, insurance and repairs is uncertain. Falling behind can make the loan due.
• Others in the home. Someone else lives in the home but is not on the loan.

For a spouse, the rules depend on status. HECM loan documents must defer the due date for an eligible non-borrowing spouse, meaning a spouse who is not on the loan but qualifies under HUD's rules to stay after the borrower dies (24 C.F.R. § 206.27(c)(3)). That deferral lasts while the spouse continues to meet HUD's conditions. Other people in the home, such as a partner who does not qualify or an adult child, may have to move out unless they repay the loan, the CFPB explains. Some families also compare this choice with selling; there is a guide to reverse mortgage vs selling in California.

When a Home Equity Loan or HELOC Usually Fits — and When It Does Not

The other side of the comparison turns on one question: can the monthly payment be carried comfortably for years?

A home equity loan or HELOC tends to fit when several conditions line up:

• Income and credit. The homeowner has steady income and credit strong enough to qualify.
• Room in the budget. The monthly payment fits within the budget.
• A clear schedule. A defined repayment schedule feels better than a growing balance.
• A known cost. The money has a specific purpose with a known price, such as a new roof.
• Rebuilding equity. Rebuilding equity over time matters, for example for heirs. Each payment shrinks the balance.

It tends not to fit when:

• No room for payments. A fixed income leaves no room for added monthly payments.
• Hard to qualify. Income or credit history would make it hard to qualify.
• No new obligations. The goal is to reach equity without taking on any new monthly obligation.

A homeowner here typically weighs the payment against the budget, because the risk is direct. If payments stop, the lender can foreclose. With a HELOC, there is one more factor. The payment can change as the rate adjusts, or when the draw period ends and repayment begins. The fuller national comparison appears in reverse mortgage vs home equity loan.