Home equity lines of credit and reverse mortgages have many similar features. Overall, however, a home equity line of credit (HELOC) offers a more versatile and advantageous way for home owners to access funds based on equity. In order to understand why it is typically a better deal for homeowners than a reverse mortgage, it helps to understand how each one works.
When you apply for a home equity line of credit, you’re essentially leveraging the built-up equity in your home and using it like you would a revolving credit line. You don’t receive a lump-sum payment, and you don’t need to ever take out the maximum amount you’re approved for.
The lender will usually offer you a dollar value against which you can borrow. There will also be a draw period during which you can take out sums of money at any intervals you wish. After the draw period ends, you begin the payback period. HELOC rates are reasonable and you can obtain access to almost the entire amount of equity in your home. These will not affect your total equity as long as you make the payments on time.
Reverse Mortgage Basics
Reverse mortgages are usually only available to borrowers over the age of 62 who have paid off, or very nearly paid off, their homes. There are no monthly payments, draw periods, or payback periods. You pay the money back when you sell the home or upon your death. Reverse mortgages are one way that older individuals can access their home’s equity in order to meet certain types of expenses they face later in life.
Why HELOCs Make More Sense for Most Borrowers
Many advocates of reverse mortgages tout the fact that the method includes no monthly payments and that borrowers get their funds in a lump sum. On the other hand, HELOCs carry various advantages when compared to reverse mortgages. Here’s a quick look:
- With a HELOC, you only pay interest on what you borrow against your home.
- Reverse mortgages have little or no credit score requirements but do require borrowers to have the financial ability to cover ongoing maintenance and property tax expenses.
- Generally speaking, anyone with decent credit and a modest amount of equity in their home can obtain a HELOC with reasonable rates and a generous borrowing limit.
- To get a reverse mortgage, you must own, or nearly own, your home.
- HELOCs have no age requirement as reverse mortgages do. In order to qualify for a reverse mortgage, most borrowers will only consider applicants who are age 62 or older.
- Reverse mortgages have fees and closing costs that makes the total cost of borrowing higher than for a HELOC.
- Any interest you pay, up to $100,000 in most cases, on a HELOC is tax deductible. While reverse mortgages don’t, technically speaking, have interest-bearing “payments,” there is no tax deduction feature.
- With a HELOC, you will not suffer a decrease in your total amount of home equity, as is the case with reverse mortgages.