Reverse Mortgage vs Home Equity Loan

Quick Comparison: Reverse Mortgage vs Home Equity Loan

This table is a general overview. Individual loan terms vary by lender and by loan.

With a reverse mortgage, the borrower must still live in the home as a principal residence, pay property taxes and homeowners insurance, and keep the home in good repair.

What a Home Equity Loan Means for You

A home equity loan is a loan secured by the home. The borrower receives one lump sum and repays it in fixed monthly installments over a set term. The CFPB says it usually has a fixed interest rate, one that will not change, and may carry upfront fees and costs.

Interest is charged on the amount still owed. Each payment lowers that amount, so the debt gets smaller until it is paid off.

The lender sets the standards for approval. A lender typically looks at how much equity is in the home, whether the borrower's income can support the monthly payment, and the borrower's credit. There is no federal age requirement.

If a first mortgage already exists, the home equity loan is usually a second lien. A lien is the lender's legal claim on the property. The CFPB notes that these loans would be second mortgages paid in addition to the first.

The home is the collateral. If payments are not made, the lender could foreclose, meaning force a sale of the home to collect the debt.

A home equity line of credit, or HELOC, is a related but different product. Instead of one lump sum, it is a revolving line the owner can draw from repeatedly up to a limit, usually at an adjustable rate.

What a Reverse Mortgage Is

A reverse mortgage lets a homeowner 62 or older borrow against home equity without monthly mortgage payments, as long as the borrower keeps the loan's ongoing obligations. The title stays in the borrower's name, the CFPB explains, and interest and fees are added to the loan balance each month and the balance grows. A fuller explanation is on the page about reverse mortgage balance growth.

The most common type is the Home Equity Conversion Mortgage, or HECM. HUD calls it the only reverse mortgage insured by the federal government, available only through an FHA-approved lender. Federal law defines an eligible homeowner as one who "is, or whose spouse is, at least 62 years of age or such higher age as the Secretary may prescribe," under 12 U.S.C. § 1715z-20(b)(1). Eligibility under 12 U.S.C. § 1715z-20(d) includes that age requirement and counseling.

There are three types of reverse mortgage:

• HECM. Federally insured and the most common type.
• Proprietary reverse mortgage. A private lender's product, often for higher-value homes.
• Single-purpose reverse mortgage. Offered by some state and local government agencies for one approved use, such as repairs.

For a HECM, the law lists the payment methods a borrower selects among, under 12 U.S.C. § 1715z-20(d)(9): a line of credit; monthly payments for a set term; monthly payments for a set term with a line of credit; monthly payments for as long as the borrower lives in the home; those payments with a line of credit; or another basis HUD approves. A lump sum is also common. All of these are what a lender may pay under the loan's terms.

The borrower must keep obligations. The CFPB lists paying property taxes and homeowners insurance, using the home as a principal residence, and keeping the house in good condition. A principal residence is where the person lives for most of the year. Under 24 C.F.R. § 206.39(a), "the property must be the principal residence of each borrower, and if applicable, Eligible Non-Borrowing Spouse, at closing."

The loan generally comes due when the last borrower dies, sells or moves out. Under 24 C.F.R. § 206.27(c), it becomes due on a borrower's death if no surviving borrower lives there. It is subject to a deferral for an Eligible Non-Borrowing Spouse, which is a spouse who is not on the loan but qualifies under HUD rules to stay. It also becomes due, with HUD's approval, in four situations:

• The home stops being a borrower's principal residence for reasons other than death, and no other borrower lives there.
• A borrower is away for longer than 12 consecutive months because of illness, and no other borrower lives there.
• Property charges are not paid.
• Another obligation of the borrower under the mortgage is not kept.

Before a HECM closes, the borrower meets with an independent counselor. The counselor explains the costs, the financial implications and alternatives. HUD's HECM Counselor Roster lists counselors, or a homeowner can call (800) 569-4287.

Key Differences Between the Two Products

The deepest difference is the direction the balance moves. A home equity loan shrinks with each payment. A reverse mortgage grows as interest and fees accumulate, and the FTC warns this can use up much, or even all, of the equity. The way it is repaid follows from that.

Monthly payments. A home equity loan needs a payment every month. A reverse mortgage needs none on the loan itself, but taxes, insurance and upkeep continue.

Age. A HECM requires the age set out above. A home equity loan has no federal age floor.

Income and credit. For a home equity loan, both largely decide approval. A HECM lender also reviews the borrower's finances, but the standard differs from a traditional mortgage's.

Upfront costs. Both have closing costs. A HECM adds two items:

• Counseling. HUD-approved agencies may charge a reasonable fee, but they cannot charge a fee to someone who can't afford it.
• FHA mortgage insurance premiums. For HECMs with FHA case numbers assigned on or after October 2, 2017, Mortgagee Letter 2017-12 set the upfront premium at 2.00% of the maximum claim amount and the yearly premium at 0.50% of the outstanding balance.

Federal rules limit the HECM origination fee, and the lender discloses it.

The home. Either way, the borrower keeps title. A paid-off home equity loan leaves the home free of that lien. A reverse mortgage is repaid when it comes due. Heirs may repay it and keep the home, or sell the home to settle the balance.

Foreclosure. Both can end in foreclosure. With a home equity loan, it follows missed payments. With a reverse mortgage, it follows a broken obligation, such as unpaid taxes or insurance, or the home no longer being the principal residence.

Cancellation. Both generally carry a three-business-day right to cancel after closing on a main residence.

Situations Where a Home Equity Loan Often Fits

A homeowner whose life resembles these tends to fit a home equity loan:

• Reliable income. The household can comfortably make a fixed monthly payment.
• A defined payoff. The owner wants a set end date and a balance that falls month by month.
• Under 62. The owner, or a spouse, has not reached the HECM age.
• One known expense. A roof, a repair or another large cost calls for a single lump sum and plain repayment.
• Staying put. The owner expects to remain long enough to repay the loan.

The tradeoff is the payment. The CFPB urges comparing more than just the monthly payment, since upfront fees count too. Falling behind puts the home at risk.

Where the need is flexible access over time rather than one sum, a HELOC is the related product. It usually has a draw period. During that time the FTC notes payments may cover only interest. Then comes a repayment period when no more can be borrowed.

Situations Where a Reverse Mortgage Often Fits

These are the circumstances in which a reverse mortgage tends to fit, described so a family can recognize its own:

• Age and wealth. The owner is 62 or older and most of what they have is in the house.
• Staying home. The owner wants to remain and needs to cover expenses without taking on a monthly loan payment.
• Fixed income. A new monthly payment would strain the budget. This is often the case for owners with high home equity and low income.
• Flexible receipt. Monthly payments, a line of credit or a combination suit the need. How much may be available depends on factors described on the page about how much a reverse mortgage provides.
• Family talked it through. Everyone understands what happens to the house later.

Not every older homeowner fits, and it is not free money. The balance grows as interest and fees are added. The borrower must live there as a principal residence, pay taxes and insurance, and maintain the home. The loan comes due when the last borrower dies, sells or moves out. A long stay in care can trigger repayment, which matters for families looking at paying for care with home equity.

Other Options Worth Knowing About

A family weighing these two loans is often carrying a larger question about how to make the years ahead work. The HECM counselor is required to discuss options beyond a reverse mortgage, under 12 U.S.C. § 1715z-20(f). Several such options exist:

• A budget and benefits review. It may turn up savings or programs, though it may not cover a large need.
• Property tax relief. Local programs can ease a yearly bill, but rules and reach vary.
• Help from family. It keeps the house debt-free, but it can strain relationships.
• Selling or downsizing. It frees equity without a loan, but it means leaving the home.
• A cash-out refinance. It replaces the first mortgage with a larger one, along with a new monthly payment.
• A home equity loan or HELOC. These are covered above, and each comes with payments.
• A reverse mortgage. It has no monthly loan payment, but a balance that grows.

No homeowner has to decide alone. A HUD-approved housing counselor can talk through the full picture.

Seeing the full range of choices can make the decision feel less like a leap and more like a considered step.