Your house is not only your residence, but also a powerful financial asset. For homeowners, attacking home equity provides a smart way to get cash without selling the place you call home. Whether you are planning a massive renovation, consolidating debt or supplementing retirement income, options like reverse mortgages, home equity loans, and home equity like line of credit will help. But which one is the best match for your financial goals?
Every homeowner doesn’t have a certain size solution, but information about each option can help you compare your choices and make smarter choices. We will first define each type of home equity loan option and then compare these three options so that you can see their similarity and differences.
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Reverse mortgages are essentially the opposite of traditional mortgage loans; instead of buying a house, lenders use equity in the house as collateral for new loans. The way you receive the loan proceeds is also very flexible. You can choose to pay in one lump sum, or even choose a line of credit or monthly installments. Options vary by reverse mortgage lender.
This sounds sweet, but it's not available to everyone. First, you must be 62 or older to get most types of reverse mortgages (including regular home equity conversion mortgages or HECM), and you will need to live for most of the year. You will then also have to own your home directly, or have the least balance left in the remaining mortgage and stay up to date within the scope of homeowner insurance, property taxes, and real estate maintenance.
No reverse mortgage is required before selling a home, moving out permanently or dying. Great, right?
Here’s a problem: Since you’re not paying on the loan balance, the interest can indeed add up and eat the home’s interests. While the law says you will never owe a reverse mortgage more than the value of your home (thank you, law), your loan balance can soar and when you die or are ready to sell your home, your loan balance is hardly fair, which is an important thing to keep in mind real estate planning.
advantage
Payment flexibility. Choose from various options such as one-time payment or regular monthly payments to get the money for the terms you want.
Tax-free retirement income. Your income from a reverse mortgage is usually not taxable, although you need to chat with a tax professional.
Receive money instead of owe money. If you don’t want to include a home in your real estate plan, a reverse mortgage can provide income you never have to pay back.
shortcoming
cost. The reverse mortgage can be costly because you will pay for ending fees like regular mortgages. If you still have a first mortgage, you will need to continue these payments.
Complications of real estate planning. If you want to use the home as part of your real estate plan, your heirs will need to refinance the reverse mortgage balance as a new mortgage or pay the balance directly to retain ownership.
Potential Medicaid eligibility impact. Depending on the situation, a reverse mortgage can be counted as an asset in the Medicaid calculation, which can delay your eligibility for benefits if you need long-term care assistance. Talk to a loan professional or financial advisor to see if your reverse mortgage is counted as an asset.
You're even deeper: Pros and cons of reverse mortgage
A Home Net Asset Loan (HEL) is a type of second mortgage loan, a term loan that allows you to borrow a percentage of your accumulated home net worth. When you take out your home equity loan, you will borrow a fixed amount in a fixed annual percentage (APR) and repay the fixed amount with a fixed payment over a fixed period, usually between five and 30 years. (You may have noticed that the keyword here is "fixed", which means that home equity loans are very predictable for borrowers.) The amount you can borrow with HEL depends on the market value of the home, home equity and good reputation.
Homeowners tend to use home equity loans to pay a lot of expenses, such as home renovations, debt consolidation, or funding major life events. A plus sign for family net worth loans? Their interest rates are lower than unsecured loan options such as credit cards and personal loans, because your home secures a loan. Since your home is mortgaged, you shouldn't take one of these loans out gently. Defaulting your home equity loan payment may put your home at a foreclosure risk.
advantage
Making larger projects a breeze. Expensive projects and bills are paid in one go in the early stage.
"Fix" everything. Fixed rates, payments and terms help with planning and budgeting.
Save taxes. If you use funds for home renovations (chat with tax professionals), your home equity loan may bring tax benefits.
shortcoming
Increased monthly fees. You need space in your monthly budget to pay extra.
Default risk. Since your home acts as collateral, there is a huge risk by default: foreclosure.
cost. Settlement fees may absorb the proceeds of your loan and increase your spending.
learn more: The best home net worth loan lender
Just like home equity loans, the Home Net Worth Credit Line (HELOC) allows you to borrow equity in your home, but it is more flexible. HELOC does not make one-time payments like home equity loans. Instead, it provides the spin credit you need during the "lottery period" which usually lasts up to 10 years. You can describe HELOC as a credit card protected by your property. You only need to pay interest on the money you borrowed during the draw.
When the draw period is over, HELOC enters the repayment phase, when you repay principal and interest on a fixed period as set out in your lending agreement with Heloc Lender. If you are looking for a flexible way to pay for ongoing expenses for smaller home renovation projects or college tuition, you might consider a line of credit.
Your credit limit will depend on the net worth and reputation of your home. And, since your home is mortgaged, you need to be eagerly watching repayments to avoid the risk of foreclosure.
advantage
flexibility. You can only borrow the amount you need when you need it, and you only need to pay interest.
Reduce costs. Compared to home equity loans, HELOC usually has lower upfront fees.
Lower rates. HELOC is usually cheaper than a credit card or personal loan (such as a credit card or personal loan).
Rotate credit. Repaying the draw will supplement your credit line so you can take out the money again during the draw without applying for a new loan.
shortcoming
Variability rate. Most HELOCs have adjustable interest rates, which means that if the general interest rate goes up, your payments may rise. (However, if the interest rate drops, your interest rate will also drop.)
Foreclosure risk. Your home is used as collateral, so failure to pay monthly may result in the loss of your property.
Potential for overspending. The revolving credit nature of HELOC may attract more you borrow or can manage.
Continue reading: How to get HELOC in 6 easy steps
When leveraging your home’s net worth, the choice can feel overwhelming – especially because reverse mortgages, home equity loans and Helocs have some similarities. Each option unlocks the value of your home, but the details make everything different. Don't worry if you insist on determining which path is right for your financial goals. We broke it for you.
When comparing home equity loans with reverse mortgages, the biggest difference is repayment. Home equity loans require monthly payments that begin immediately, while reverse mortgages do not require repayment until you sell the home, move out or die.
Reverse mortgage is best Retirees need stable cash flow without monthly payments.
Home equity loans are the best Homeowners who require a one-time payment and can cope with regular payments.
When we stack HELOC vs. reverse mortgages, the main difference is funding flexibility. HELOC acts as a spinning credit line that allows you to borrow as needed and pay later during the draw. By contrast, reverse mortgages provide funds in front or installments and defer repayment until you sell the home, move out or go past it.
Reverse mortgage is best Retirees need stable cash flow without immediate repayment.
HELOC may be the best Homeowners need flexible, ongoing funding access.
Finally, let's take a look at the home equity loans versus HELOC. With these two home equity loan options, the key difference is how you get the money. A home equity loan gives you a fixed monthly payment of one-time payment, making it ideal for a one-time fee such as a major renovation. HELOC creates a circular line of credit that allows you to borrow as needed during the draw. Although home equity loans provide predictable payments, the exchange rate of HELOC is variable, depending on economic conditions.
Home equity loans may be the best For homeowners who have been given specific, huge fees since interest rates, terms and payments, for loan life, considering them.
HELOC may be the best Those who need to continue to use funds with borrowing flexibility and don’t mind variable interest rates.
The difference between reverse mortgage and home equity loan is that reverse mortgage is a loan product reserved for older people (ages 62 and older) and does not require repayment until the owner sells the home, moves out or dies. However, home equity loans offer a one-time payment, requiring immediate fixed monthly payments, and there is no age requirement.
The major failures of a reverse mortgage include high upfront expenses and the mortgage principal accumulated over time, thus reducing your home’s net worth. Reverse mortgages can also affect your eligibility for needs such as Medicaid, such as demand-based government programs.
Yes, if older people meet lenders’ requirements, including good credit scores and stable income, prove that they can easily make the monthly payments they need.
Laura Grace Tarpley Edited this article.