In Matters of Home Equity, Reverse Mortgage vs Home Equity Loan

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Both reverse mortgages and home equity loans help homeowners unlock and use their home equity for several purposes. Supposing you can have both but only need one, which would be most helpful to you? Would you go for a reverse mortgage or a home equity loan?

Well, your choice in tapping your home equity would depend on a myriad of things. There’s your age, your equity level, and your ability to repay your mortgage.

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Tapping Your Home Equity

Proof that your home is your most important investment is in your equity. It’s an important source of funds when you need to pay off high-rated debts, improve your home, send your kid to school, and meet urgent or scheduled expenses.

In fact, there are various ways to tap this valuable home equity. There’s cash-out refinance where you pay off your old loan and pocket the difference in cash. Then, there are home equity lines of credit, home equity loans, and reverse mortgages too.

Qualifying for a reverse mortgage or a home equity loan involves separate processes and eligibility requirements. Their features may be similar or different, as you shall know below.

Reverse Mortgage: A Product for Senior Homeowners

If you are 62 years old or above, your age makes you a likely candidate for a reverse mortgage. This product is designed to supplement senior homeowners’ income in retirement.

With this age limit, not all homeowners or those who outright own their homes can qualify for this type of mortgage.

But this limitation is offset by its unique structure. Instead of making monthly payments on standard mortgages, home equity loans included, reverse mortgage borrowers receive disbursements instead.

These disbursements come in the form of a lump sum, if one chooses a fixed-rate mortgage; or a line of credit or scheduled payments for those opting for an adjustable-rate mortgage. You will continue to receive these payments until the loan becomes due and payable.

Most reverse mortgages today are backed by the Federal Housing Administration. HECMs, as they are called, have mortgage insurance premiums that are charged upfront and monthly.

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Home Equity Loans for All Homeowners

Any mortgage borrower with sizeable equity like reverse mortgage borrowers can apply for a home equity of loan, for as long as he/she is of legal age.

Broadly speaking, home equity loans or HELs can refer to those that offer a lump sum at closing and home equity lines of credit that can be tapped anytime during their draw period.

The standard HELs, i.e. those offering lump sum, require a monthly payment on top of your existing first-lien mortgage if you have one. And they are most likely fixed-rate mortgages.

Getting a HEL follows a similar process as that of a first-lien mortgage. You need a credit score, income, and appraisal to qualify and show to the lender that your home has enough equity to borrow against.

HECMs and HELs

  • A reverse mortgage is a first-lien mortgage while a home equity loan is a second mortgage. In the order of priority, first-lien mortgages get paid off first then second mortgages. If there is no first-lien mortgage, the HEL takes the first priority.
  • An appraisal in both types of loans is used to determine the level of equity found in the home. As to reverse mortgages, this and the borrower’s age and current interest rate will be used to calculate how much a senior can borrow.
  • Both HECMs and HELs loans undergo the usual vetting process for a mortgage in order to qualify.
  • Because they need to be underwritten, expect a host of fees and costs for origination, servicing, appraisal, and mortgage insurance for HECMs, among other things.

Are you ready to tap your equity? Which should it be?

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