If you own your home and want to tap into your equity to get cash, you might consider one of two options: taking out a home equity line of credit (HELOC) or getting a reverse mortgage. But which option is better for you?
Below you can learn more about home equity lines of credit and reverse mortgages, the upsides and downsides to these two types of loans, and then determine if either might work for you.
A home equity line of credit (HELOC) is just what it sounds like -- a line of credit loan that is based on the equity of the home. HELOCs allow a borrower to draw on a line up to a certain limit approved by the lender. (Learn more in Nolo’s article Home Equity Loan and HELOC Basics.)
A HELOC can be a good option for people looking to leverage their home to get some extra cash and who have enough income to make payments. For example, a HELOC can be a good option if you need additional money for something like home repairs or a major medical bill and can afford monthly payments.
The upsides to HELOCs include the following.
There are downsides to a HELOC as well.
Reverse mortgages, like HELOCs, allow borrowers to convert home equity into cash, but have different benefits and risks than HELOCs.
A reverse mortgage is different from “forward” mortgages because with a reverse mortgage, the bank pays you, rather than you making payments to the bank. The most widely available reverse mortgage is the FHA's Home Equity Conversion Mortgage (HECM). Reverse mortgage payments are distributed in the form of a lump sum, monthly amounts, or a line of credit. (You can also get a combination of monthly installments and a line of credit.)
The amount you receive is based on the equity in your home. Since you receive payments from the lender, your equity decreases over time as the loan balance gets larger.
The loan doesn’t have to be paid back until you die, move, or sell the home. When one of these events occurs, the home is typically sold to pay off the loan or the lender will foreclose to satisfy the debt. (Learn more about reverse mortgages in Nolo’s article Reverse Mortgages for Retirees and Seniors.)
Generally, reverse mortgages are available to those who:
In addition to not having to make any monthly payments, there are other advantages to reverse mortgages.
Mortgage brokers and lenders often make it sound like there is no downside to a reverse mortgage, but this type of loan is not right for everybody. There are substantial issues and risks involved with reverse mortgages.
Senior citizen homeowners are often coerced into taking out reverse mortgages without realizing that there are other options are available. The Consumer Financial Protection Bureau (CFPB) (www.consumerfinance.gov) advises consumers who are considering taking out a reverse mortgage to consider all other alternatives, including:
Learn more about reverse mortgages, as well as other available options for older homeowners, at AARP’s website at www.aarp.org/revmort.