Reverse Mortgage vs HELOC

Side-by-Side: How the Two Products Compare

The table below sets out the structural differences. Costs and rates vary by lender and are left out on purpose.

How a Reverse Mortgage Works

The most common reverse mortgage is the Home Equity Conversion Mortgage, or HECM. The Federal Housing Administration insures it, and HUD runs the program. HUD states that the HECM is the only reverse mortgage insured by the federal government and is available only through an FHA-approved lender.

Who can borrow. Under 24 C.F.R. § 206.33, "the youngest borrower shall be 62 years of age or older at the time of loan closing." Under 24 C.F.R. § 206.39, the home must be the principal residence of each borrower, and of any Eligible Non-Borrowing Spouse, at closing. A principal residence is where the owner lives most of the year, as the CFPB explains. The CFPB adds that any existing mortgage must be paid off at closing, with the owner's own funds or reverse mortgage money, and that federal debt, such as unpaid federal income taxes, must be cleared the same way.

What the borrower keeps doing. Interest and fees are added to the balance each month, so it grows. The owner must live in the home, pay property taxes and homeowners insurance, and keep the house in good condition, as the CFPB states. If these obligations are not met, the loan can come due and the home can be lost to foreclosure.

How money arrives. The statute, 12 U.S.C. § 1715z-20(d)(9), lists payout methods: a line of credit, monthly payments for a set term, monthly payments for as long as the borrower lives in the home, combinations of these, or another basis HUD approves. The CFPB notes that a lump sum is also possible, though it may make less money available, and that the borrowing limit depends on age, interest rate and home value.

Costs. Federal law requires HUD to set limits on the origination fee, and the fee may be fully financed into the loan (12 U.S.C. § 1715z-20(r)). A limit is a ceiling, not what a lender charges. HUD's Mortgagee Letter 2017-12 set the initial mortgage insurance premium at 2 percent of the maximum claim amount and the annual premium at 0.5 percent of the balance, for HECMs with case numbers assigned on or after October 2, 2017. HUD publishes any later changes.

Counseling. Before borrowing, the owner must receive counseling from an independent third party not connected to the lender or to sellers of annuities, insurance or investments (12 U.S.C. § 1715z-20(d)(2)(B)). HUD's page points to its HECM Counselor Roster and the number (800) 569-4287.

How a HELOC Works

A HELOC tends to feel familiar, because the CFPB compares it to a credit card backed by the house. Money can be drawn more than once, and paying it back frees up credit again. If the home already has a mortgage, a HELOC is a second mortgage paid on top of the first.

The two phases. Many HELOCs start with a draw period, when the owner can borrow and, as the FTC notes, may only have to pay interest. The CFPB gives 10 years as one example. Then comes the repayment period, when no more borrowing is allowed and the balance must be repaid, either at once or over time. Terms vary by lender.

Payments and rates. HELOCs usually carry a variable rate, so the payment can change from month to month. The CFPB warns that falling behind could cost the owner the home. Under 12 C.F.R. § 1026.40(f), the rate may change only with a public index outside the lender's control.

Freezes. A lender may stop new draws or lower the limit in set situations, including a significant drop in home value or a material change in the owner's finances (12 C.F.R. § 1026.40(f)(3)(vi); the list continues).

Who qualifies. Lenders set their own income, credit and equity standards.

If steady income and a clear repayment plan are part of the picture, a HELOC is worth understanding on its own terms.

Key Differences That Matter Most

For a household on a fixed income, the first difference is cash flow. A reverse mortgage removes the required mortgage payment, and can replace an existing one; a HELOC adds a payment.

Equity moves in opposite directions. A HELOC balance falls as it is repaid. A reverse mortgage balance rises as interest builds, and the FTC cautions it "can use up much – or even all ─ of your equity."

Both can end in foreclosure. A HELOC borrower risks it by missing payments. A reverse mortgage borrower risks it by not keeping up taxes, insurance, occupancy or the home itself.

For heirs, the HECM's non-recourse feature matters. Non-recourse means the debt is limited to the home: under 12 U.S.C. § 1715z-20(d)(7), the homeowner is not liable for any shortfall beyond what the home's net sale proceeds, or FHA insurance benefits, cover. The FTC puts it simply: the borrower or the estate can't owe more than the home's value when the loan comes due and the home is sold. Any equity left after repayment generally stays with the estate.

Qualification differs too. A HELOC turns on lender underwriting. A HECM turns on age, residence, equity, counseling and HUD's other requirements, which lenders apply.

HECMs also come with rules a HELOC does not have: they come only through FHA-approved lenders, require independent counseling, serve only owners 62 and older, and bar originators from tying the loan to other financial products (12 U.S.C. § 1715z-20(n)).

When a Reverse Mortgage May Be Worth Understanding

Picture a hypothetical widow, 74, with a paid-off house and a Social Security check that no longer covers her property tax bill and roof repairs. Situations like hers are where a reverse mortgage tends to fit. The homeowner is 62 or older, lives in the home as a principal residence, holds substantial equity, and has a fixed income that makes monthly loan payments hard to carry.

It also tends to fit when a mortgage payment is still owed in retirement and removing it would ease the monthly budget, or when the owner plans to stay for many years and wants income spread over that long horizon. Adult children helping a parent often look at it when asking whether staying in the home is sustainable at all.

The obligations still run alongside the loan: taxes, insurance, upkeep and living in the home, with a balance that grows. It remains one option among several, alongside a HELOC, a home equity loan, a cash-out refinance, downsizing and property tax relief programs.

Situations Where a HELOC Often Fits

A HELOC tends to fit a different household. The owner has steady income that comfortably covers monthly payments and wants to keep as much equity as possible.

It often fits a defined, time-limited need: a kitchen remodel, a medical bill, a short-term bridge until a sale or an inheritance, with a known plan to repay. It is also the option open to an owner younger than 62, who cannot yet qualify for a HECM. And it suits someone who values drawing and repaying again and again during the draw period.

The tradeoffs are real. Qualifying requires income and credit that meet the lender's standards, and a variable rate means the payment can rise. The lender may also freeze the line in the situations described above. Like a reverse mortgage, it is one option among several: a home equity loan, a cash-out refinance, downsizing, property tax relief and a reverse mortgage all sit beside it.

Questions Worth Asking Before Deciding

Families often find it helps to talk these through at the kitchen table before calling anyone.

• Can the payments last? If a HELOC is chosen, could the household keep paying if the rate rose or income dipped?
• How long will the owner stay? A reverse mortgage carries upfront costs, so a short stay spreads them over little time.
• What if care is needed elsewhere? Under 24 C.F.R. § 206.27(c)(2)(ii), a HECM can become due, upon HUD's approval, if a borrower is away for more than 12 consecutive months because of physical or mental illness and no other borrower lives there. A HELOC's payments continue wherever the owner lives.
• What about a spouse? If one spouse is not a borrower, HUD rules may defer the due date for an Eligible Non-Borrowing Spouse who meets the requirements (24 C.F.R. § 206.27(c)(3)).
• Are other options on the table? County property tax programs, downsizing, family help, a home equity loan or a cash-out refinance may change the picture. The CFPB points to benefitscheckup.org for local programs.
• Has a counselor been consulted? HECM counseling is required and independent of lenders. Counselors can be found through HUD's roster.