If you’ve built equity in your home, you can liquidate it using a handful of different choices, including a home equity loan, home-equity line of credit (HELOC), or reverse mortgage.
These loans come in handy when you need extra cash for a home improvement project, educational funds, debt consolidation, medical bills, a major purchase, or another important reason.
Which product would work best for you? Take the time to carefully compare the pros and cons of a reverse mortgage vs. HELOC vs. home equity loan to make a better-informed decision.
...in as little as 3 minutes – no credit impact
Reverse mortgage vs. HELOC vs. home equity loan in a nutshell
Here’s a quick breakdown that outlines the key features of and differences between a reverse mortgage, home equity loan, and HELOC.
| Financing option | How it works | How is it different |
|---|---|---|
| HELOC (home equity line of credit) | – Functions like a revolving credit line secured by your home. – You can borrow funds as needed during the draw period and repay them later with interest. – Payments are often interest-only at first, then shift to principal and interest. |
– Offers the most flexibility in borrowing; unlike a loan, you don’t receive a lump sum upfront. – Has variable interest rates, which can fluctuate over time. – Best for ongoing or unpredictable expenses, rather than one-time costs or retirement income. |
| Home equity loan | – Provides a one-time lump-sum payout based on your home’s equity. – You repay the amount through fixed monthly payments over a set term at a fixed rate. |
– More predictable than a HELOC since rates and payments remain constant. – Unlike a reverse mortgage, it requires regular monthly payments. Ideal for one-time expenses or debt consolidation rather than flexible, ongoing borrowing. |
| Reverse mortgage | – Allows homeowners aged 62 and up to convert part of their home equity into cash without monthly payments. –The loan balance grows over time and is repaid when you move, sell, or pass away. |
– No monthly payments required as long as you stay in your home. – Specifically designed for seniors, unlike HELOCs or home equity loans. – Decreases the remaining equity available to heirs. |
What are reverse mortgages, HELOCs, and home equity loans?
Here are some more thorough definitions of these loan types:
Reverse mortgages
AÂ reverse mortgage is a form of financing offered to homeowners 62 years of age or older. This loan enables you to convert a portion of your home equity into cash without needing to sell your residence or make monthly mortgage payments.
Here, you don’t pay the lender – the lender pays you either via a lump sum, a line of credit, or monthly payments. Your loan balance will increase as time passes because interest and fees will grow. Typically, you don’t need to repay the loan until you sell your property, permanently move out, or pass away. That’s when the loan is repaid using proceeds from the property sale; you or your heirs get to keep any equity left over.
Many popular reverse mortgage loans, including the FHA's Home Equity Conversion Mortgage (HECM) protect borrowers from owing more than the home is worth.
Home equity lines of credit (HELOCs)
A HELOC (home-equity line of credit) is a flexible form of home-equity financing. It works like a credit card that enables you to tap into your current home’s equity. You get approved for a maximum borrowing limit, and during the typical five- to 10-year draw period you’re allowed to withdraw only what you need at the time you need it, borrowing and repaying the funds multiple times.
Later, you’ll repay what you owe with interest. Better.com offers a digital HELOC process designed for fast preapproval—often as quick as one day for eligible borrowers.
...in as little as 3 minutes – no credit impact
Home equity loans (HELoan)
A home-equity loan, also called a second mortgage, is a fixed-term loan that lets you borrow a lump sum by tapping your home’s equity. The amount you can borrow is often based on the difference between your property’s current market value and your remaining mortgage balance. You’ll repay the loan by making fixed monthly payments of principal and interest over a set time, commonly spanning from 5 to 30 years.
Key differences between a reverse mortgage, HELOC, and home equity loan
Ask the experts and they’ll tell you that each of these three options has distinct features and benefits.
“With a HELOC, you have two distinct phases – a withdrawal period and a repayment period. During the former, you can borrow as much as you want up to a set limit, repay what you have borrowed, and borrow it again if you want to – all while only paying interest on what you have borrowed,” explains Martin Orefice, CEO of Rent To Own Labs. “When you’re withdrawal period ends, you can no longer take out any more money, and you will have to repay your principal balance on a set schedule like a traditional home-equity loan.”
A home equity loan can often be the fastest option among the three, “because it doesn’t require as much paperwork in many cases. The necessary legal documentation is fairly straightforward for someone who needs a full payout all at once, instead of installments spread out over time,” says Martin Gasparian, a business expert and attorney.
A reverse mortgage, by contrast, is targeted toward homeowners who are close to retirement or those who have already retired, notes Ryan Carrigan, CEO and cofounder of moveBuddha.
“This gives you access to the equity in your home without having to take on monthly payments. If you are planning on remaining in your home for the long run, it frees up options in case you need to supplement your monthly income, settle debt, or just need extra cash to cover everyday expenses,” Carrigan continues.
Pros and cons of a reverse mortgage, HELOC, and home equity loan
Let’s dig deeper into the finer points that distinguish these three options – specifically, their advantages and disadvantages.
Reverse mortgage pros and cons
On the plus side, a reverse mortgage:
– Promises tax-free cash flow without monthly mortgage payments.
– Permits older homeowners to remain in their home while accessing equity.
– Offers flexible payout options, including a lump sum, monthly payments, or line of credit.
– Loan repayment is deferred until you move, sell, or pass away.
– Has a non-recourse feature that ensures you will never owe more than your property’s value at sale.
– Offers greater borrower protections when you choose a FHA-insured Home Equity Conversion Mortgage (HECM).
But the cons of a reverse mortgage are:
– It decreases your equity, resulting in a lower inheritance for your heirs.
– Your loan balance will increase because interest and fees accumulate over time.
– You must continue paying property taxes, homeowners insurance, and maintenance expenses.
– The upfront costs, such as mortgage insurance and origination fees, can be expensive.
– It could affect your eligibility for certain need-based government programs.
– If you fail to fulfill loan requirements or move out of your home, repayment may be required.
HELOC pros and cons
Among the benefits of a HELOC:
– You can typically use HELOC funds for most purposes, such as home improvements, education, or consolidating higher-interest debt. If you’ve built up significant home equity, you could qualify for a large credit line that may cover most or all of a big purchase.
– It functions as a revolving line of credit you can access as needed during the draw period, which usually lasts between five and ten years. During this time, you only pay interest on the amount you actually borrow—not on your entire credit limit.
– Because you can draw funds multiple times, it’s useful for paying closing costs, renovations, or ongoing expenses like property taxes.
– HELOCs may have variable or fixed interest rates, and since your home secures the loan, rates are typically lower than those for unsecured financing options such as personal loans or credit cards.
– It allows you to access your home equity without refinancing your existing mortgage.
– Interest on a HELOC may also be tax-deductible if the funds are used for a rental or investment property.
However, there are downsides:
– Repayment happens in two phases: During the draw period, you only make interest payments on the amount borrowed, but once repayment begins – typically over 10 to 20 years – you’ll owe both principal and interest, which increases your monthly payments.
– With a variable-rate HELOC – the most common type – your monthly payments can fluctuate as interest rates rise or fall, making it hard to predict future costs. This uncertainty can complicate budgeting, especially when you’re managing more than one property.
– Having access to a large credit line can be tempting, but it also increases the risk of overspending. Borrowing more than you planned could lead to higher interest costs and a heavier debt load than expected.
– Because your home serves as collateral, failing to meet repayment terms could put your property at risk of foreclosure.
– Most HELOCs come with upfront costs, including closing fees that generally range between 2% and 5% of your approved credit line.
– Qualifying can be more difficult if you intend to use the funds for an investment or rental property.
Home equity loan pros and cons
Here’s the good news about home equity loans:
– They provide a lump sum of money, which is helpful for major expenses like home improvements or consolidating high-interest debt.
– They offer fixed monthly payments and interest rates, giving you predictable budgeting over the life of your loan.
– Because your home serves as collateral, interest rates are generally lower than those for credit cards or personal loans.
– Interest on a HELOC may be tax-deductible in certain circumstances, typically when the funds are used to improve the property securing the loan. Consult a tax professional for details.
Then again, there are disadvantages:
– Since your home is used as collateral, failing to make payments could put your property at risk of foreclosure.
– Taking out a home equity loan reduces the equity available in your home, which limits your future borrowing options.
– Home equity loans require immediate repayment of both principal and interest, which can strain monthly finances.
– Upfront fees, such as closing costs, appraisal fees, and origination charges, can add significantly to the total cost of the loan.
– If property values decline, you could end up owing more than your home is worth.
– Adding a home equity loan increases your monthly obligations on top of your existing mortgage, which may impact your budget.
How to choose between a reverse mortgage, HELOC, or home equity loan
We’ve given you a lot of information to parse through. But it can be easier to pick from these three choices by providing specific scenarios and explaining who makes a good candidate for each. So, what’s best when you compare a reverse mortgage versus home equity loan versus HELOC?
When a reverse mortgage makes sense
“A reverse mortgage offers more flexibility for retirees, which can make a big difference – especially if you are on a fixed monthly income,” says Carrigan. “The nice thing is that it does not usually require regular repayments. However, if you plan to preserve your home’s value for your beneficiaries, you might be better off with a home equity loan or HELOC vs. reverse mortgage.”
Orefice agrees that reverse mortgages are ideal for older homeowners who want to live off their home’s equity and age in place.
“It’s possible, but difficult, to repay a reverse mortgage at the end of the term without selling the home. But viewing a reverse mortgage as, in essence, an early home sale is often the best way to look at it,” he says.
Attorney David Weisselberger points out that a reverse mortgage is preferable for specific borrowers.
“It’s optimal when you are 62 years or older, require additional money to live, and have no successors to leave your home to. And it suits best when your monthly payments are onerous,” says Weisselberger.
Marty Zankich, director and owner of Chamberlin Real Estate School, believes a reverse loan makes the most sense when you are past your prime, “since you may not have an active job or thriving business to pay your expenses.”
When a HELOC makes sense
A HELOC, on the other hand, is the right choice if you require the ability to access cash quickly when you need it the most, per Weisselberger.
“It’s also a good bet when you have an open-ended home improvement project or as an alternative to an emergency fund,” adds Orefice. “Because you only pay interest on what you have taken out, you can keep your costs low as long as you are careful. The big drawback is the repayment phase. If you get complacent, you could be dealing with steep money payments and be forced to refinance.”
Zankich is also a fan of HELOCs when you don’t need a one-time lump sum from a lender.
“A HELOC allows you to repay the interest proportionate to the amount you borrow instead of the total amount you are allowed to take,” he says.
When a home equity loan makes sense
A home equity loan is your best choice when you require a large, one-time chunk of cash for a particular purpose – whether it’s a significant home upgrade, investment property purchase, or debt consolidation. It offers more certainty about exactly how much you will borrow and what you’ll be required to repay every month. And you don’t have to be 62 or older to access this financing.
“Think of a home equity loan as the most general-purpose option among the three. It’s less flexible than a HELOC, but it doesn’t require selling your home early like a reverse mortgage would,” Orefice points out. “While it’s best to use your home equity for home improvements – since this boosts the equity you are borrowing against – home equity loans are great for all kinds of expenses or paying off other high-interest debts.”
Reverse mortgage, HELOC, and home-equity loan FAQs
Which home-equity option is best for borrowers with bad credit?
If you have poor credit, qualifying for a HELOC or home equity loan can be more difficult. That’s because lenders typically evaluate both your credit history and your home equity before approving the loan. A low credit score or past financial difficulties could make it harder to secure favorable terms or qualify at all. In contrast, a reverse mortgage can be a better option for older homeowners with bad credit because the loan is primarily secured by the value of your property rather than your creditworthiness. Repayment is deferred until you sell your home, permanently move out, or die.
Which option gets you cash fastest: a reverse mortgage, home equity loan, or HELOC?
A home equity loan often allows you to access cash the quickest because it provides a lump sum payment immediately after the loan is approved and closed. A HELOC can also provide relatively fast access to funds; however, it functions as a revolving line of credit, which means you can withdraw money gradually versus all at once, and approval can take a bit longer. A reverse mortgage is commonly the slowest option, as it necessitates counseling and more extensive federal-mandated procedures before funds are disbursed, particularly for Home Equity Conversion Mortgages (HECMs).
Which has the lowest overall cost: home-equity loan, HELOC, or reverse mortgage?
A HELOC or home equity loan is often less expensive than a reverse mortgage if you can afford regular payments. Case in point: A $100,000 home equity loan at a 7% fixed interest rate over 15 years could set you back $13,000 in interest plus up to $5,000 in closing fees, while a HELOC could have lower upfront expenses but variable interest. A $100,000 reverse mortgage often comes with higher fees, including up to $6,000 in origination costs, 2% upfront mortgage insurance, and 0.5% annual insurance, with interest compounding over time – significantly reducing your home equity.
Shop around, narrow choices, get preapproved
Fortunately, there are several different ways you can access your home’s equity and borrow money when you need it. A reverse mortgage, HELOC, and home-equity loan have their unique benefits and drawbacks, which is why you should consider each option carefully.
To make a more informed decision, crunch the numbers, consult with a trusted financial professional, and shop around among different lenders.
If you’re interested in exploring a HELOC, Better’s digital platform can help you check your options and see what you may qualify for.
...in as little as 3 minutes – no credit impact