HELOC vs. Reverse Mortgage: Which Is Better?

If you’re deciding between a home equity line of credit (HELOC), home equity loan, or reverse mortgage, it’s essential to understand each product. A HELOC offers flexible access to funds with variable rates, while a home equity loan provides a lump sum with fixed payments. Both require monthly payments and have no age restrictions.

A reverse mortgage allows homeowners aged 62 or older to convert home equity into cash without monthly payments, but it can reduce your home’s equity over time. We’ll explore each option’s pros, cons, and eligibility requirements to help you make the best choice for your financial needs.

HELOC vs. home equity loan vs. reverse mortgage

It’s important to understand the differences between a HELOC, home equity loan, and reverse mortgage before choosing one. The table below outlines the primary ways these differ in terms of interest rates, repayment terms, and funding times.

Later, we’ll explore each of these financial products in more detail so you can decide which one might best suit your needs.

Here are the primary differences between HELOCs, home equity loans (HE loan), and reverse mortgages (RM):

Detail	HELOC	HE loan	RM
Avg. rate	9.28%*	8.52%*	7.56% fixed; 6.13% adj.*
Typical rate type	Variable	Fixed	Both
Typical terms	10 – 20 years	5 – 30 years	Due after you die or move
Typical amounts	85% of home value**	85% of home value**	40% – 60% of home value
Funding time	2 wks. – 2 mos.	2 wks. – 2 mos.	Up to 45 days

HELOC vs. home equity loan vs. reverse mortgage eligibility

When deciding between a HELOC, home equity loan, or reverse mortgage, it’s essential to get to know the typical eligibility requirements for each. While all three options allow homeowners to tap into their home equity, the qualifications vary. 

For instance, reverse mortgages are more accessible for seniors with less-than-perfect credit but require homeowners to be at least 62 years old. In contrast, HELOCs and home equity loans have stricter credit and income requirements but no age restrictions, making them suitable for more borrowers. 

The following table shows the common eligibility requirements for HELOCs, home equity loans, and reverse mortgages:

Detail	HELOC & home equity loan	Reverse mortgage
Min. credit score	620 – 680	None
Max. debt-to-income ratio	43% – 50%	None
Max. loan-to-value ratio	85%	40 – 60%
Property type	Primary residences, vacation homes, or investment properties	Primary residences
Borrower age	No age requirements	At least 62 years old

A reverse mortgage may be easier to get if you have poor credit because there’s no minimum credit score requirement. However, you must be at least 62 years old to qualify for a reverse mortgage. No age requirement exists for a HELOC or home equity loan.

When you apply for a HELOC or a home equity loan, many lenders consider additional factors, such as your debt-to-income ratio (DTI), which compares your monthly debt against your monthly gross income. Lenders want to verify that you can afford to repay the loan.

With a reverse mortgage, you won’t make monthly payments, so lenders aren’t concerned about your ability to repay the loan via your income. Instead, they mostly care about how much equity you have in the property, which is what will repay a reverse mortgage. 

For all three types of financing, the lender will review your loan-to-value ratio (LTV) to evaluate your home equity. The LTV compares your loan balance to your home’s value. A low maximum LTV of 40% to 60% is typical with a reverse mortgage versus an LTV of up to 85% for HELOCs and home equity loans. 

How does a HELOC work? 

A HELOC operates like a credit card, except the limit is based on your home’s value. The interest rate is often variable, fluctuating based on market conditions. You can borrow funds as needed during the draw period, typically five to 10 years, often with the option to make interest-only payments. 

The repayment period begins after the draw period ends, typically lasting 20 to 25 years. During this period, you’ll repay both interest and principal, similar to how repayment on a traditional home mortgage works. 

Here are the pros and cons of a HELOC:

Pros

• Flexibility

  You can borrow against the line of credit as needed and only pay interest on your outstanding balance.

• Interest-only payments

  During the draw period, you can usually make interest-only payments.

• Long repayment period.

  The repayment period lasts up to 30 years, depending on the lender.

Cons

• Risk of losing home

  If you default on the loan, a lender can foreclose on your home.

• Fees

  Lenders generally charge several fees on HELOCs, including closing costs, appraisal fees, and annual maintenance fees.

• Variable rates

  Your rate can change based on the economy, meaning it can increase due to inflation and other factors that affect interest rates.

When our expert recommends a HELOC

Catherine Valega

CFP®

I recommend HELOCs and home equity loans to younger clients who need to access a larger sum for renovations to their homes and who have the ability to service the extra loan payment each month.

How does a reverse mortgage work?

A reverse mortgage allows you to borrow against your home’s equity if you’re at least 62 years old. This minimum age requirement exists because reverse mortgages are designed to help seniors supplement their retirement incomes.

Unlike a traditional mortgage, reverse mortgages do not require monthly payments. Instead, the loan is repaid when specific events occur, such as moving out, selling the home, or passing away. Interest and fees accrue on the outstanding balance, which increases over time. 

You’re not required to make monthly payments, but you’re still responsible for keeping up with your property taxes and maintenance to ensure the home stays in good condition.

Reverse mortgages can be disbursed as lump-sum payments, monthly payments, or lines of credit. The most common type—an HECM—is insured by the Federal Housing Administration (FHA).

Here are the pros and cons of a reverse mortgage:

Pros

• No monthly payment

  You only repay your loan when you die, move to another location, or sell your home.

• Not taxed

  The IRS doesn’t tax the money you receive from a reverse mortgage because it’s considered debt.

• Paid off home

  Proceeds from a reverse mortgage go toward paying off your mortgage first, which frees up money to tackle other financial goals.

Cons

• Fees

  Like a regular mortgage, a reverse mortgage has fees, such as origination fees, appraisal fees, and closing costs.

• Your heirs may need to repay the full loan balance

  If your heirs want to keep your home when you pass away, they must pay off the total outstanding balance of the reverse mortgage or at least 95% of the home’s appraised value.

• Risk of foreclosure

  If you don’t keep up with your home’s maintenance and property taxes, a lender can take your home.

Does our expert recommend reverse mortgages?

Catherine Valega

CFP®

As a financial planner, I would only speak about reverse mortgages to those senior clients who are house-rich but cash-poor. A reverse mortgage allows them to stay in their home and receive an income stream.

Reverse mortgage vs. HELOC vs. home equity loan: How to decide

When choosing between these three financial products, it’s best to consider your goals. Here are four questions to ask yourself:

• Am I old enough to qualify for a reverse mortgage?
• Do I want to make monthly payments?
• Do I want monthly income to supplement my retirement?
• How much equity do I have in the property?

The following table highlights scenarios where a HELOC or home equity loan may be better than a reverse mortgage and vice versa.

If you…	HELOC, home equity loan, or reverse mortgage?
Are under 62 years old	HELOC or home equity loan
Are retired with no mortgage or a low loan balance	Reverse mortgage
Are retired with 15% equity or more	HELOC or home equity loan
Want to supplement your retirement income	Reverse mortgage
Prefer not having monthly payments	Reverse mortgage

Remember: A reverse mortgage is only available to people who are at least 62 years of age. If you’re younger and want to borrow against your home equity, consider another option, such as a HELOC or home equity loan. 

Assuming you’re at least 62, the next factor to consider is how much equity you’ve built up in your home. You’ll need significant home equity to qualify for a reverse mortgage, often at least 40%. You can consider a home equity loan or HELOC if you don’t have this much equity. 

Also, consider whether you’re comfortable making monthly payments or prefer extra retirement income. A reverse mortgage provides monthly payouts from your home’s equity without requiring payments. With a HELOC or home equity loan, you must make regular payments on the borrowed amount.

Keep in mind that getting financing of any type may not be your only option. You could also consider downsizing to save money. If you need help figuring out whether a HELOC or reverse mortgage is a better fit for you, we recommend contacting a financial professional.

Long-term effects of HELOC vs. reverse mortgage

The short-term effect of taking out a HELOC or home equity loan is that you can use the funds to consolidate debt or pay for other expenses, such as home repairs. But in the long run, you must repay what you borrow, which can affect your ability to tackle other financial goals.

You may qualify for a tax deduction if you use HELOC or home equity loan funds to buy, build, or substantially improve your home. If you die with a HELOC or home equity loan balance, your estate is reduced by the amount you owe.

A reverse mortgage can be beneficial in the short run because it provides supplemental cash in retirement. However, the long-term effect is having more debt over time and less equity in your home. When you repay your reverse mortgage in full, you may deduct the interest you pay on the loan.

Like a HELOC or home equity loan, passing away with a reverse mortgage balance means your heirs will inherit less.

FAQ

Can I take out a reverse mortgage and a HELOC at the same time?

It’s possible to take out a HELOC and a reverse mortgage at the same time. However, qualifying for a reverse mortgage can be challenging if you have a HELOC with a substantial balance. 

Once you obtain a reverse mortgage, your lender may restrict you from taking further draws on the HELOC. The lender wants to ensure you have sufficient equity in your home to secure the reverse mortgage, reducing the risk associated with the loan.

Can I take a HELOC and home equity loan out at the same time?

You may be able to take out a HELOC and a home equity loan if you show your lender why you need both loans. The maximum amount you can borrow will include the commitment on both loans and your current mortgage balance, potentially limiting the loan amount.

A home equity loan allows you to borrow a lump sum and repay it over time with fixed monthly payments, and a HELOC allows you to borrow and repay the funds as much as needed during the draw period. Once the draw period ends, you’ll repay the HELOC balance with fixed monthly payments. 

Instead of taking out both products, consider getting a HELOC and paying more than the minimum. This option is more practical, providing flexibility with fewer obligations to manage, simplifying your finances, and making it easier to keep track of your payments.

Can I take a home equity loan and a reverse mortgage out at the same time?

It’s possible to take out a home equity loan and a reverse mortgage at the same time, but it might not make sense. You typically need significant equity to qualify for a reverse mortgage. Qualifying for a reverse mortgage could be more challenging if you also have a home equity loan. 

How do these options affect my credit score?

A reverse mortgage usually doesn’t affect your credit score because most reverse mortgage companies don’t report to the national credit bureaus. Applying for a HELOC or home equity loan could lower your credit score by up to five points. 

Repaying the HELOC or home equity loan on time can help you improve your credit score, while late payments can harm it.

Are there any restrictions on how I can use the funds from a reverse mortgage, HELOC, or home equity loan?

You can use HELOC or home equity loan funds for almost any purpose. Most lenders don’t impose restrictions. You can use a reverse mortgage for just about anything too, but some states offer single-purpose reverse mortgages you can only use for taxes or home improvement projects.

How does the economic environment affect HELOC or home equity loan interest rates or reverse mortgage terms?

When the Federal Reserve increases benchmark rates, it drives up the average annual percentage rates (APRs) of HELOCs, home equity loans, and reverse mortgages. In addition, higher rates tend to reduce the amount you can borrow with all three financial products.

What is the 60% rule of a reverse mortgage?

What’s commonly referred to as the “60% rule” in reverse mortgages relates to the initial amount the borrower can receive in the first year. In the first year of an HECM (a type of reverse mortgage), the borrower can’t receive more than 60% of the loan amount. 

What are the downsides of a reverse mortgage vs. a HELOC or home equity loan?

A reverse mortgage can be beneficial because you won’t owe loan payments and can turn your home equity into an income stream. However, it might have higher fees than a HELOC or home equity loan and can reduce the inheritance value for your heirs.

Every time you receive a payment from the lender with a reverse mortgage, your loan balance increases, which decreases your home equity. In contrast, each principal and interest payment you make on a HELOC or home equity loan reduces the loan balance and rebuilds your equity.

A home equity loan or HELOC may be better if you want to build equity for your heirs rather than deplete it. However, a reverse mortgage could be worth considering if you can’t afford monthly loan payments and need to access your home equity to support your retirement.