Reverse Mortgage vs Home Equity Loan

There are a few different options to choose from if you want to borrow from your home’s equity. Options include a reverse mortgage, home equity loan, or a home equity line of credit. A line of credit is not a lump sum, but more like a credit card. On the other hand, when you compare a reverse mortgage vs a home equity loan, you’re looking at a lump sum payment of equity back into your hands. But which is the better choice for a loan?

Reverse Mortgage

If you are age 62 or older, you can consider a reverse mortgage. These are also known as home equity conversion mortgages (HECM). For this type of mortgage, you must have considerable equity in your home. You also must be willing to part with your home instead of leaving it to your heirs. 

When you apply for a reverse mortgage, you ask the bank to pay you back the equity in your home. Then, you stop making mortgage payments and start receiving them. In addition, you may stay in your home along with your spouse (unless you break the terms of the reverse mortgage).

However, there are some important considerations to look at before signing on the dotted line. 

First off, there are terms to each reverse mortgage that outline when you can lose your home to the lender. Stipulations causing you to lose the home can include if you:

• Stop paying your home’s taxes
• Don’t make required repairs on your home
• Fall behind on your home insurance payments
• Choose to sell your home
• Move and stay gone for a certain number of months
• If your spouse is not on the mortgage and you pass away
• A reverse mortgage accumulates interest charges over time, and there are also lender fees and closing costs associated with taking this type of mortgage out.

Home Equity Loan

A home equity loan is another option to borrow from your home’s equity. With a home equity loan, you decide how much equity you’d like to borrow. You and your lender then make a contract together with a plan for you to pay back the amount you borrowed. Interest does not accumulate with this loan as it does in a reverse mortgage, and you don’t have to be 62 years old to get one.

However, you do need good credit and a steady income. If you fall behind on your equity loan payments, you can lose your home. So it is essential to have a stable income source and good credit before taking out a home equity loan. If a lender is willing to give you a home equity loan with bad credit or an unstable earning history, you should consult your attorney to ensure that there are no fees or hidden agendas that you missed. 

A home equity loan is generally a fixed-rate loan with a fixed interest rate. You receive the lump sum that you qualify for from the bank. You then make monthly payments on your loan, including the principal and interest. You also continue to pay your regular monthly mortgage payments in addition to your home equity loan payments. 

Home Equity Line of Credit (HELOC)

A home equity line of credit is similar to a home equity loan in that you are borrowing from the equity in your home, and there is no age requirement. However, this type of borrowing is more like a credit card than a fixed-rate loan. The bank gives you a line of credit up to an approved amount. 

You may then withdraw amounts of money as needed from your line of credit. For each withdrawal, there are interest charges that accrue until you pay back your line of credit. The interest rate is usually variable, and it is crucial to know what the interest rate is before you decide to pull a significant amount from your account. 

If you don’t know how much you need and would like your equity to be available for emergencies, this may be an excellent route to take.

Compare Options: Reverse Mortgage vs Home Equity Loan

With a reverse mortgage, your lender pays you the equity in your home, but you no longer own the home. With a home equity loan, the lender lets you borrow the equity in your home, and you keep owning the home. You pay back your equity over time. With a home equity line, you borrow a bit at a time and pay back monthly like a credit card.

Now that you know the options available when it comes to borrowing against your home, you can make an informed decision. Depending on where you are in life and your unique situation, one could be better than another for you and your loved ones. Speaking with a knowledgeable real estate attorney can help you make the best decision. 

We Can Help

No matter how you use the equity in your home, there are drawbacks and potential issues with each way of pulling cash out of your home. Consulting with a real estate attorney at Jarrett Law can bring you peace of mind about your decision. We focus on real estate law and know the ins and outs of the contracts used in mortgages, deeds, buying, and selling of homes. We’d love to work with you to help you make the wisest decision in your particular situation. Contact us to find out how we can help.