HELOC vs. Reverse Mortgage: Which Is Better?

If you want to tap your home’s equity for just about any purpose, you might consider two popular options: a home equity line of credit (HELOC) and a reverse mortgage. A HELOC allows you to borrow against your equity as needed. Meanwhile, lenders can disburse reverse mortgage funds in various ways.

To help you determine which one is the right fit for you, we take a closer look at how HELOCs and reverse mortgages work, including their pros and cons and eligibility requirements.

What is a home equity line of credit (HELOC)? 

A HELOC operates like a credit card, except the limit is based on the value of your home. The interest rate is generally variable, meaning it fluctuates based on the economy. 

How do you borrow money with a HELOC?

You can borrow funds as needed during the draw period, which typically lasts 10 years. During this period, some lenders may allow you to make interest-only payments. 

How do you repay a HELOC?

Once the draw period ends, a repayment period of up to 30 years begins, and you must repay the interest and principal balance.

It’s wise to consider the pros and cons of any financial investment before you proceed. 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, which means it can increase as a result of inflation and other factors that impact interest rates.

Ask the expert

Catherine Valega

CFP®

I consider HELOCs for younger families who need to make updates to their home but don’t have the free cash flow immediately available. Keep in mind that the interest associated with HELOCs is only deductible when the proceeds are used to improve the home and you itemize your deductions. You only pay interest on the amount you’ve actually borrowed against the line—so it makes sense in many cases to open a HELOC but not use it until you absolutely must. The use of the line of credit should also be weighed against your other financial resources, interest rates, and other factors pertaining to your unique financial situation.

What is a reverse mortgage?

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, you don’t make monthly payments to a lender. Instead, a reverse mortgage pays off your remaining balance, and you repay the loan after certain events occur, such as:

• After you die
• When you move to a new primary residence
• Once you sell your home

Do you pay interest on a reverse mortgage?

Like a traditional mortgage, the lender still charges an annual percentage rate, which includes interest, plus fees, on your outstanding reverse mortgage balance. 

For example, say a lender gives you a lump sum advance of $30,000 with a 6% APR. In this scenario, your total balance would grow to $54,582 after 10 years.

Do you make monthly payments with a reverse mortgage?

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

What else do I need to know about a reverse mortgage?

The lender can disburse your loan in several ways, such as a lump-sum payment, monthly payment, or line of credit.

Several types of reverse mortgages exist: Home Equity Conversion Mortgages (HECMs), single-purpose reverse mortgages, and private reverse mortgages. The most common—a 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

  Just like a regular mortgage, a reverse mortgage comes with fees, such as origination fees, appraisal fees, and closing costs.

• Your heirs may have to repay the full loan balance

  If your heirs want to keep your home when you pass away, they’ll have to 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.

Ask the expert

Catherine Valega

CFP®

I would only discuss a reverse mortgage for clients with no other options—those very senior clients who are cash poor but housing rich. This may help them stay in the home and also enjoy an enhanced standard of living. Their heirs, however, may have a different opinion, as they will not receive the home outright upon your death. The bank will be the first to receive their money.

HELOC vs. reverse mortgage rates and terms

Here’s a table highlighting the differences between a HELOC and a reverse mortgage.

Detail	HELOC	Reverse mortgage
Average annual percentage rate (APR)	9%*	8.96% for fixed-rate loans* 7.15% adjustable-rate loans*
Fixed or variable rate	Often variable	Both are available
Repayment terms	5 – 30 years	Typically repaid after you die or move out of your home
Eligibility	Must have at least 15% equity in your home Credit score requirements vary by lender Often need a debt-to-income ratio of 43% or lower	You must be at least 62 years old Home must be primary residence Your home must be in good shape
Loan amounts	Often up to 85% of the value of your home minus your outstanding balance. (Certain lenders might allow a higher percentage.)	Typically 40% to 60% of your home’s appraised value
Time to fund	2 weeks – 2 months	Up to 45 days
Minimum credit score requirement	Varies by lender but can be as low as 620	None

*Averages as of October 2023.

Reverse mortgage vs. HELOC: Eligibility differences

A reverse mortgage may be easier to get if you have poor credit because there’s no minimum credit score requirement. However, you need to be at least 62 years old to qualify for a reverse mortgage. By contrast, there’s no age requirement for a HELOC.

Lenders consider some of the same factors when you apply for a reverse mortgage or HELOC, such as your income and credit history. 

But when you apply for a HELOC, many lenders consider additional factors, such as your debt-to-income ratio (DTI), which compares your monthly debt against your monthly gross income. 

How to decide between a reverse mortgage and HELOC

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

• Do I want to make monthly payments?
• Do I want the option to receive a lump sum payout?
• Do I want to receive monthly income to supplement my retirement?
• Am I old enough to qualify for a reverse mortgage?

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

If you …	HELOC or reverse mortgage?
Prefer not having monthly payments	Reverse mortgage
Are under 62 years old	HELOC
Want to supplement your retirement income	Reverse mortgage
Want the option to receive a lump sum	Reverse mortgage

If you need help figuring out whether a HELOC or reverse mortgage is a better fit for you, we recommend contacting a financial professional. 

Note: A HELOC and a reverse mortgage aren’t your only options. Before you choose either, consider alternatives, such as taking out a home equity loan or downsizing to save money.

Long-term effects of HELOC vs. reverse mortgage

The short-term effect of taking out a HELOC is that you can use the funds to consolidate debt or pay for other expenses, such as a home repair. But in the long run, you’ll have to 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 funds to buy, build, or substantially 

improve your home. If you die with a HELOC balance, your estate will be 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 you’ll have 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, 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. But it can be difficult to qualify for a reverse mortgage if you have a HELOC with a substantial balance.

How does either option affect my credit score?

A reverse mortgage usually doesn’t affect your credit because most reverse mortgage companies don’t report to the national credit bureaus. 

By comparison, applying for a HELOC can lower your score by up to five points. Repaying the HELOC on time can help you improve your score, while late payments can harm it.

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

You can use HELOC funds for almost any purpose. Most lenders don’t impose restrictions. You can use a reverse mortgages 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 interest rates or reverse mortgage terms?

When the Federal Reserve increases benchmark rates, it drives up the average annual percentage rates (APRs) of HELOCs and reverse mortgages. In addition, higher rates tend to reduce the amount you can borrow with a reverse mortgage.