Key Takeaways
- Reverse mortgages remove monthly mortgage payments for homeowners 62+, but you still pay taxes and insurance, and the balance grows over time.
- Home equity loans offer a lump sum with fixed payments, making them a better fit if you have a steady income and want predictable costs.
- The right choice depends on your cash flow, time in the home, and whether leaving equity to heirs matters.
Your home is likely your biggest asset, and after years of building equity, you may be thinking about how to use that value in retirement. The key is finding an option that works for you without adding financial stress.
Both reverse mortgages and home equity loans let you use your home’s equity, but they work differently. This guide explains each option, compares its costs and trade-offs, and helps you choose the one that fits your retirement goals.
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What is a reverse mortgage, and how does it work?
A reverse mortgage lets you use your home equity without having to make monthly mortgage payments. Instead, the loan balance increases over time as interest adds up. You pay back the reverse mortgage when you sell your home, move out for good, or pass away. Until then, you keep ownership and the title to your home.
See if you qualify for a reverse mortgage. Start hereYou can receive the funds in several ways, depending on the type of reverse mortgage and how you want to use the money:
- Lump sum: You receive the full amount at closing.
- Monthly payments: You get a steady income for a set period or for as long as you live in the home.
- Line of credit: You draw funds as needed, and unused funds may grow over time.
- Combination: You can mix and match these options to suit your financial needs.
What is a home equity loan, and how does it work?
A home equity loan lets you borrow money using your home’s equity and pay it back with fixed monthly payments over a set period. You get all the money at once, and the interest rate stays the same, so your payments are predictable.
There is no age requirement to qualify, but lenders evaluate your home equity, credit score, and income, and typically require you to maintain at least 15% to 20% equity after the loan closes. Borrowers often use home equity loans for large, one-time expenses such as home improvements, debt consolidation, or medical costs.
What is a HELOC, and how does it work?
A HELOC lets you borrow money using your home’s equity through a revolving credit line instead of a fixed loan. You can borrow money as needed during the draw period, which usually lasts 5 to 10 years. Many lenders let you make interest-only payments on what you use during this time.
After the draw period ends, the repayment period begins, and you repay both principal and interest over 10 to 20 years. Most HELOCs have variable interest rates, so your monthly payment can change over time.
Comparing reverse mortgage vs home equity loan vs HELOC
Here’s a side-by-side look at how these three options stack up:
Check your home equity loan options. Start here| Feature | Reverse Mortgage | Home Equity Loan | HELOC |
| Age requirement | 62 or older | None | None |
| Monthly payments | None required | Fixed payments | Variable payments |
| How you get funds | Lump sum, monthly, or line of credit | One-time lump sum | Draw as needed |
| Interest rate | Fixed or variable | Typically fixed | Typically variable |
| Upfront costs | Higher | Lower | Lowest |
| Impact on equity | Decreases over time | Rebuilds with payments | Rebuilds with payments |
Age and eligibility requirements
Reverse mortgages require you to be at least 62 years old and complete counseling with a HUD-approved advisor before closing. Home equity loans and HELOCs do not have an age requirement, but lenders focus on your credit score, income, and ability to handle monthly payments when deciding whether to approve your application.
How funds are disbursed
A reverse mortgage offers multiple payout options, including a lump sum, monthly payments, a line of credit, or a combination of these. A home equity loan provides the full amount upfront, while a HELOC gives you access to a revolving credit line that you can draw from as needed during the draw period.
Repayment obligations
A reverse mortgage does not require monthly payments, and you repay the loan later when you sell the home, move out, or pass away. In contrast, you repay a home equity loan through fixed monthly payments, while HELOC payments vary over time and often increase once the repayment period begins.
Interest rates and fees
Reverse mortgages tend to have higher upfront costs, including origination fees, mortgage insurance premiums, and closing costs, and the balance grows over time as interest accrues. Home equity loans and HELOCs usually have lower upfront costs, making them less expensive to set up, though you still pay interest over the life of the loan.
Impact on home equity and ownership
All three options reduce your home equity when you borrow, but they do so in different ways. With a reverse mortgage, your loan balance grows as interest accrues, reducing your equity. With a home equity loan or HELOC, your equity goes back up as you make payments.
No matter which option you choose, you still own your home. Reverse mortgages also include non-recourse protection, so you or your heirs will never owe more than what the home sells for.
Pros and cons of reverse mortgages
See if you qualify for a reverse mortgage. Start hereBenefits of reverse mortgages
- No monthly mortgage payments. Frees up cash flow for everyday expenses.
- Flexible payout options. Choose a lump sum, monthly income, line of credit, or combination.
- Non-recourse protection. You’ll never owe more than your home is worth.
- Tax-free proceeds. The money isn’t considered taxable income.
- Stay in your home. You can live there as long as you meet the loan obligations.
Drawbacks of reverse mortgages
- Higher upfront costs. Origination fees and FHA insurance can add up.
- Growing loan balance. Interest accrues, which reduces your equity over time.
- Less for heirs. There’s less equity left to pass on.
- Ongoing obligations: You’re still responsible for property taxes, insurance, and maintenance.
- More complexity. The process involves mandatory counseling and more paperwork.
Pros and cons of home equity loans
Benefits of home equity loans
- Predictable payments. The fixed rate means your payment stays the same every month.
- Lower interest rates. Typically cheaper than credit cards or personal loans.
- Lower upfront costs. Much less expensive to set up than a reverse mortgage.
- Preserves equity. You rebuild equity with each payment.
- No age restriction. Available to any homeowner who qualifies.
Drawbacks of home equity loans
- Monthly payment required. You’ll need a steady income to cover payments.
- Foreclosure risk. Your home secures the loan, so missing payments puts it at risk.
- Lump sum only. You pay interest on the full amount right away, even if you don’t need it all.
- Qualification requirements. Lenders look for good credit and verifiable income.
When a reverse mortgage makes more sense
A reverse mortgage might work better if you’re 62 or older and want to get rid of monthly mortgage payments. It’s especially useful if you plan to stay in your home for many years, since the high upfront costs are easier to absorb over a longer time frame.
The line of credit option can also serve as a financial safety net. The unused portion grows over time, independent of your home’s value, giving you more access to funds for medical bills or unexpected expenses down the road.
When a home equity loan makes more sense
A home equity loan often fits better if you have a specific expense in mind, like a major renovation or paying off high-interest debt. The lump-sum structure works well for defined projects with clear costs.
If leaving equity to heirs matters to you, a home equity loan lets you maintain and rebuild equity over time. And if your retirement income from pensions, Social Security, or investments can comfortably cover a new fixed payment, the lower upfront costs make this option more attractive.
How to decide which option is right for you
Time to make a move? Let us find the right mortgage for youA reverse mortgage might be a good fit if:
- You’re 62 or older.
- Eliminating monthly payments is your main goal.
- You plan to stay in your home long-term.
- Leaving the maximum inheritance isn’t your top priority.
A home equity loan might be a good fit if:
- You have a steady retirement income.
- You prefer predictable fixed payments.
- You have a specific expense in mind.
- Preserving equity for heirs matters to you.
A HELOC might be a good fit if:
- You want the flexibility to borrow as expenses arise.
- Your income can handle variable payments.
- You don’t need all the funds right away.
Find the right way to access your home equity
The right choice depends on your age, how steady your income is, how long you plan to stay in your home, and what you want to leave for your heirs. A reverse mortgage can free you from monthly payments, while a home equity loan gives you predictable costs and helps you keep more equity.
If you’re considering a reverse mortgage, it’s a good idea to talk with a HUD-approved counselor. They can help you understand all the details before you make a decision.
FAQs about reverse mortgages vs home equity loans
Most lenders look for equity of 50% or more. The exact amount you can borrow depends on your age, current interest rates, and your home's value. Generally, older borrowers can access more funds.
Yes, foreclosure is possible if you don't pay property taxes and homeowners' insurance, fail to maintain the home, or move out for more than 12 consecutive months. Staying on top of these due-and-payable obligations is key.
The 95% rule protects heirs. If the loan balance exceeds the home's value, heirs can pay off the loan by paying 95% of the current appraised value. FHA insurance covers the rest.
No. The money you receive counts as loan proceeds, not income, so it's not subject to federal income tax. It also typically doesn't affect Social Security or Medicare benefits.
Heirs have options. They can repay the balance and keep the home, sell the home to pay off the loan and keep any leftover equity, or hand the keys to the lender. Because of non-recourse protection, heirs are never personally on the hook for any balance that exceeds the home's sale price.
