Home Equity Loans vs. Reverse Mortgages

Are you 62 years or older and looking to tap into the equity in your home but are unsure if a reverse mortgage or a home equity loan is the way to go? There are big differences between a reverse mortgage and a home equity loan.

Home equity loans or a home equity line of credit are considered a second mortgage on your home. To qualify for a home equity loan or line of credit, you have to have enough income to pay  back the loan on your mortgaged home.

In addition, there are debt to income ratios that banks consider when giving you a home equity loan or home equity line of credit (HELOC). Not to mention, a HELOC is a variable rate line of credit, meaning the interest rate you pay isn’t a set rate and can go up. Home equity loan rates are also a lot higher than mortgage rates these days so you will be paying more interest than with a traditional mortgage.

A reverse mortgage is different from a loan or line of credit. The difference is that a reverse mortgage pays you, the mortgagee. The amount of money you can borrow depends on the equity in your home, your age, the prevailing interest rate, and the appraised value of your home or Federal Housing Administration’s mortgage limits for your area, whichever is less.

You can use a reverse mortgage calculator to see how much you qualify for but the general rule of thumb is the more valuable your home is, the older you are, the lower the interest rate, the more you can borrow.

Reverse mortgages may be a great way to tap into the equity in your home.  As long as the home is your principal residence, you don’t have to make payments on the money you receive with a reverse mortgage. Keep in mind that as with a regular mortgage, the loan becomes due in full when you move or sell the house.