Reverse Mortgage vs. Home Equity Loan: Key Differences
Using your home equity can help with expenses, but choosing the right loan may feel confusing when your income, monthly payment and long-term plans all matter. A reverse mortgage generally lets an eligible homeowner access equity without a required monthly principal and interest payment, while a home equity loan provides a lump sum that is repaid through scheduled monthly payments. In this guide, I will go over how both options work, what they cost, how you may qualify and what homeowners on Cape Cod and throughout Massachusetts should consider.
Key Takeaways
- Monthly Payments: Reverse mortgages generally do not require monthly principal and interest payments, while home equity loans do.
- Qualification: Reverse mortgage eligibility focuses on age, equity, property and financial assessment requirements. Home equity loan approval commonly depends on income, credit, debt and equity.
- Repayment: A reverse mortgage usually becomes due after a maturity event, such as selling the home or no longer using it as a principal residence.
- Best For: The right choice depends on your cash flow, available equity, repayment plans and how long you expect to keep the property.
I am Mike Burton (NMLS# 3373), Mortgage Broker/Owner at Slade Mortgage Group. I have 40 years of mortgage experience and I am licensed in Massachusetts and Florida. My job here is to help you understand the differences, so you can ask the right questions and decide which direction makes sense for you.
Quick Answers
- Will I have a monthly mortgage payment? A home equity loan requires scheduled payments. A reverse mortgage generally does not require monthly principal and interest payments as long as the loan requirements are met.
- Do I still own my home with a reverse mortgage? Yes. You keep title to the home, subject to the reverse mortgage lien and the terms of the loan.
- Does a home equity loan require income and credit review? Generally, yes. Lenders commonly review credit, income, existing debts and the property’s available equity.
- Can I use the money for different expenses? Loan proceeds can generally be used for many purposes, subject to the program terms and any closing requirements.
Reverse Mortgage vs. Home Equity Loan at a Glance
| Feature | Reverse Mortgage | Home Equity Loan |
|---|---|---|
| Basic purpose | Converts part of the home’s equity into available funds | Borrows a lump sum against available equity |
| Monthly principal and interest payment | Generally not required while loan obligations are met | Required according to the repayment schedule |
| Common qualification focus | Age, equity, property eligibility and financial assessment | Income, credit, debt-to-income ratio and equity |
| Interest | Accrues on the outstanding loan balance | Paid through scheduled monthly payments |
| Typical repayment | Usually due after a maturity event | Repaid over a set loan term |
This table gives you the basic differences. Your actual terms will depend on the loan program, current market rates, property value and your financial information. Guidelines can change, so current information should always be reviewed before making a decision.
How Does a Reverse Mortgage Work?
Ok, here is how the program works. A reverse mortgage allows an eligible homeowner to borrow against part of the equity in a principal residence. Instead of making a required monthly principal and interest payment, interest and certain financed costs are generally added to the loan balance.
The most common reverse mortgage is the Home Equity Conversion Mortgage, or HECM. It is insured by the Federal Housing Administration and generally requires the youngest eligible borrower to be at least 62. Proprietary reverse mortgage programs may have different requirements.
The amount available is based on several items, including:
- The age of the youngest borrower or eligible non-borrowing spouse
- The appraised value of the home
- Current interest rates
- Existing mortgage balances and other property liens
- The selected payment or proceeds option
- Current program lending limits and guidelines
An existing mortgage generally needs to be paid off at closing. Reverse mortgage proceeds may be used for that purpose, but the available proceeds must be sufficient. If they are not, the homeowner may need to bring additional funds to closing.
What Responsibilities Continue With a Reverse Mortgage?
A reverse mortgage removes the required monthly principal and interest payment, but it does not remove the responsibilities of owning the home. You generally must continue to:
- Pay property taxes on time
- Maintain required homeowners and flood insurance
- Keep the property in reasonable condition
- Use the property as your principal residence
- Follow the other terms of the loan
If these responsibilities are not met, the loan may become due. No worries, these details are reviewed during the application and counseling process. I want you to understand the ongoing obligations before moving ahead.
How Does a Home Equity Loan Work?
A home equity loan is usually a second mortgage that provides a lump sum and requires monthly repayment over a set term. The rate is often fixed, although available structures vary by lender. Your payment is based on the amount borrowed, the interest rate and the repayment term.
Because payments begin shortly after closing, the lender generally needs to verify that you have enough qualifying income to handle the new payment along with your other monthly debts. Credit history and available equity are also important.
A home equity loan is different from a home equity line of credit. A loan usually provides one lump sum. A HELOC home loan is generally a revolving credit line that allows draws during an available period and often has a variable rate.
How Qualification Is Different
Reverse Mortgage Qualification
A reverse mortgage uses a financial assessment, but qualification does not work exactly like a traditional home equity loan. The lender generally reviews income, credit history, property charges and available financial resources. This helps determine whether the borrower can continue paying taxes, insurance and other property expenses.
If the financial assessment identifies concerns, a portion of the available proceeds may need to be reserved for future property charges. Whether this applies, and how much may be set aside, depends on the complete scenario and current guidelines.
Home Equity Loan Qualification
A home equity lender generally considers:
- Documented qualifying income
- Credit history and credit score
- Current monthly debt obligations
- The property’s appraised value
- Existing mortgage and lien balances
- The requested loan amount
The lender will calculate a combined loan-to-value ratio by comparing the home’s value with all mortgage debt secured by the property. Maximum ratios vary by lender, property type, credit profile and occupancy.
How Interest and Loan Balances Compare
With a home equity loan, scheduled payments generally reduce the balance over time. Part of each payment pays interest and part pays principal, depending on the loan terms.
With a reverse mortgage, the balance usually grows because interest and financed costs are added to what you owe. You may choose to make voluntary payments, but monthly principal and interest payments are generally not required while the loan remains in good standing.
This is an important difference. One option creates a new monthly obligation. The other usually uses more of the home’s equity over time. Neither choice should be made from the monthly payment alone.
What Costs Should You Expect?
Both options may have appraisal, title, recording and lender-related costs. A reverse mortgage may also have mortgage insurance and counseling requirements. Costs vary based on the program, property, loan amount and current guidelines.
Ask for a written loan estimate and take your time reviewing it. Look at the interest rate, closing costs, loan term, projected balance and how much money will actually be available to you.
For a reverse mortgage, it is also helpful to review how the balance may change over several years. For a home equity loan, review the required payment and how it fits with your other expenses. This is 1 example, we have many options to choose from.
Which Option May Fit Your Plans?
A reverse mortgage may be worth reviewing when your goal is to access equity without adding a required monthly principal and interest payment. You must still meet the age, occupancy, property and financial assessment requirements.
A home equity loan may be worth reviewing when you want a lump sum, can qualify for and manage the monthly payment, and prefer a scheduled repayment plan. It may also preserve more equity over time if the balance is paid down as planned.
Before deciding, ask yourself:
- How long do I expect to keep this property as my principal residence?
- Can my monthly cash flow comfortably support another payment?
- How much equity do I want to preserve?
- Do I need one lump sum or access to funds over time?
- What happens if my plans change?
- How could the loan affect the property options available to my estate?
Please don’t hesitate to ask questions. The information may take some time to settle in. I am happy to go over it again.
Cape Cod Property Considerations
Homes on Cape Cod and the Islands may have property details that need extra review. Flood insurance, condominium approval, seasonal use, private septic systems and coastal property conditions can affect the loan process.
A reverse mortgage generally requires the home to be your principal residence. A second home on Cape Cod, Nantucket or Martha’s Vineyard would not normally meet that occupancy requirement for a HECM. A home equity loan may allow different occupancy types, but the lender’s guidelines and available terms can vary.
Property values in Barnstable County, Plymouth County, the South Shore and the Boston Area can also affect which programs are available. If the loan amount is above current conforming guidelines, a jumbo home loan or another option may need to be reviewed.
Let’s Review the Choices Together
The main idea is to have you comfortable with how each option works. I can review your property, existing mortgage, available equity and monthly budget. From there, we can compare the payment, costs and long-term effect of each choice.
Call, text or email me at Slade Mortgage Group if you would like to go over your scenario. I am here to help you understand the options and the next steps. We will do this together.
Frequently Asked Questions
What happens to a reverse mortgage when the homeowner moves?
A reverse mortgage generally becomes due when the home is sold or is no longer the borrower's principal residence. The loan can usually be repaid from the sale proceeds, refinanced or paid with other available funds.
Can heirs keep a home that has a reverse mortgage?
Heirs may be able to keep the home by satisfying the reverse mortgage balance according to the loan and program rules. They should contact the loan servicer promptly because notices, deadlines and available options may apply.
Is counseling required before getting a reverse mortgage?
Independent counseling is generally required for an FHA-insured HECM. The counselor explains the program, costs, alternatives and borrower responsibilities before the loan can move forward.
Can a reverse mortgage be used on a second home?
A HECM generally requires the property to be the borrower's principal residence, so a second home usually will not qualify. Other financing options may be available depending on income, credit, equity and property use.
Can a condominium qualify for a reverse mortgage?
A condominium may qualify if the property and project meet the applicable program requirements. Approval can depend on the loan type, condominium documentation and current FHA or lender guidelines.
This is educational and not financial advice. Loan programs and guidelines can change. Talk with a licensed mortgage professional about your specific scenario.
Mike Burton
Mike has over 33 years in the mortgage industry as a top originator for each institution he was employed with. Mike started Slade Mortgage Group in 1997 and formed a team of professionals to service clients by beating the banks.
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