If you're over 62 and need to borrow against your home equity,
what's the better option? A reverse mortgage or a home equity
loan/line of credit?
Both have advantages and disadvantages. A reverse mortgage is
costlier, but doesn't have to be repaid until you sell the home. A
home equity loan keeps more money in your pocket, but requires
regular monthly payments that retirees on a fixed income might find
Long-term income vs. short-term cash
The general rule of thumb is that a reverse mortgage works
better for someone who needs a long-term, steady source of income,
while a home equity loan is better for someone who needs short-term
cash that they can repay. But that can vary, depending on
Reverse mortgages are really just another type of home equity
loan. They're officially called Home Equity Conversion Mortgages
(HECMs) by the FHA, which insures the vast majority of reverse
mortgages made in this country. As with any home equity loan, you
borrow money which is later paid back along with any accumulated
fees and interest.
Repayment deferred and limited
For seniors, the big attraction of a reverse mortgage is that
they don't have to be repaid until they vacate the home. At that
time, the mortgage note is typically repaid from the proceeds of
the sale of the home, with the remainder going to the borrower or
A borrower's liability on a reverse mortgage also can never
exceed the value of the property securing the note - whatever the
home eventually sells for is the most the lender is entitled to. So
borrowers who choose to receive their payments in the form of
regular installments for as long as they own the home never have to
worry about the money running out.
The downside of a reverse mortgage is the cost. There are
substantial closing charges, the interest rate is higher than on a
conventional home equity loan or line of credit, and there are
insurance fees that run about $25-$35 a month. All of which means
you may not have much equity left when it comes time to vacate your
home - which could be a problem if you need that money to help pay
for assisted living costs or other arrangements.
As an alternative to a reverse mortgage, some borrowers have
tried setting up a home equity line of credit (HELOC) and drawing
out regular amounts over a period of time. While this results in
lower costs for interest and fees, it's also a very risky approach.
The lender could cut off your line of credit at any time and demand
repayment of the loan, meaning you'd likely have to sell the
property. This really only works if you're planning to stay in the
property only a short time longer, and even then you have to make
regular monthly payments.
A reverse mortgage can be used for short-term financial needs,
such as major home repairs or sudden medical expenses, if repaying
the loan would be difficult. Reverse mortgages can be taken out as
a limited series or immediate payouts or as a line of credit to
cover short-term expenses. Again, the loan doesn't have to be
repaid as long as you live in the home, but interest and fees will
accumulate in the meantime.
A standard home equity loan or line of credit, on the other
hand, probably makes more sense for short-term expenses if you can
afford the regular payments they require, since the total cost is
less than for a reverse mortgage.