Reverse Mortgage vs HEI: Which Is Better?

Homeowners with significant equity often look for ways to turn that value into cash without taking on a traditional home equity loan or HELOC. Two alternatives you may encounter are reverse mortgages and home equity investments (HEIs).

At first glance, they can seem similar. Both allow homeowners to access equity without making their monthly mortgage payments. But the way each option delivers the funds and how those funds get repaid is very different.

In this article (Skip to...)

• What is a reverse mortgage?
• What is a home equity investment?
• The difference between a reverse mortgage and an HEI
• Which option makes more sense?
• The bottom line

What is a reverse mortgage?

A reverse mortgage allows homeowners age 62 or older to borrow against their home equity without making monthly mortgage payments. The most common type is the FHA-insured Home Equity Conversion Mortgage (HECM).

Instead of paying the lender each month, the loan balance grows over time as interest and mortgage insurance are added. The loan typically becomes due when the borrower sells the home, moves out permanently, or passes away.

Reverse mortgages are designed for older homeowners who plan to stay in their homes and want to use their equity to supplement retirement income, cover long-term care costs, or create a financial buffer.

How reverse mortgage funds are drawn

One of the most important, and often misunderstood, aspects of a reverse mortgage is how the funds are accessed. Depending on the loan type and structure, borrowers can choose from several payout methods:

• A lump sum at closing (available with fixed-rate HECMs).
• A line of credit that can be drawn from as needed.
• Monthly payments for a set term or for as long as the borrower lives in the home.
• A combination of these options.

For many borrowers, the line of credit is the most appealing feature. With a reverse mortgage line of credit, you only accrue interest on the amount you actually use. Any unused portion remains available and can even grow over time, increasing future borrowing capacity.

What is a home equity investment (HEI)?

A home equity investment isn’t a loan; it’s a contract in which a homeowner receives a lump sum of cash in exchange for giving an investment company a percentage of the home’s future value.

Since it’s not a loan, there are no monthly payments and no interest charges. The HEI provider is repaid when the home is sold, refinanced, or the agreement reaches the end of its term, which is often 10 to 30 years. At that point, the homeowner must repay the original investment amount plus the agreed-upon share of the home’s appreciation.

How HEI funds are accessed

Unlike a reverse mortgage, an HEI typically provides funds as a lump sum payment at closing. Once the money is received, there’s no ability to draw additional funds later. This structure can work well for homeowners who have a specific, one-time expense, like paying off debt or making a major home improvement project.

However, it doesn’t offer the same flexibility as a line of credit. If your circumstances change and you need additional funds down the road, you’ll have to seek out another financing option.

The difference between a reverse mortgage and an HEI

The biggest difference between a reverse mortgage and an HEI lies in how equity is used over time. With a reverse mortgage, equity is accessed gradually. Borrowers can choose when and how much to draw, particularly with a line of credit. Because interest accrues only on funds actually used, drawing slowly can help manage long-term costs.

With an HEI, equity is effectively monetized upfront. The homeowner receives a lump sum in exchange for giving up a portion of future home appreciation. The cost of the HEI depends largely on how much the home’s value increases over time, not on how long the homeowner waits to access the money.

Costs and long-term tradeoffs

Reverse mortgages come with upfront and ongoing costs, including origination fees, closing costs, and FHA mortgage insurance. Interest accrues over time, increasing the loan balance. However, only drawing funds as needed can help limit how quickly that balance grows.

HEIs don’t charge interest or require monthly payments, which can make them feel less expensive on the surface. But the real cost is tied to future home appreciation. In a strong housing market, the amount owed to the HEI provider can far exceed the original investment.

It’s also worth noting that FHA-insured reverse mortgages include consumer protections, like non-recourse rules that prevent borrowers or heirs from owing more than the home is worth. HEIs operate under private contracts, and protections vary by provider.

Reverse mortgage vs HEI: Which option makes more sense?

A reverse mortgage may be a better fit for homeowners who:

• Are age 62 or older and plan to age in place.
• Want flexible access to funds over time.
• Prefer borrowing against equity rather than sharing future appreciation.
• Value FHA consumer protections.

An HEI may make more sense for homeowners who:

• Don’t qualify for a reverse mortgage.
• Need a one-time lump sum and don’t expect to need additional funds later.
• Plan to sell or refinance within a defined timeframe.
• Are comfortable trading future appreciation for immediate cash.

The bottom line on a reverse mortgage vs HEI

If you’re comparing a reverse mortgage and HEI, neither option is inherently better. The right choice depends on how you want to access your equity, how long you plan to stay in your home, and how much flexibility you need.

Reverse mortgages function as a long-term, flexible borrowing tool that allows homeowners to draw funds as needed. HEIs function as an equity-sharing transaction that converts future appreciation into cash today.