Reverse mortgage vs. home equity loan vs. HELOC: Which option is right for me?​

Homeowners looking to access the equity they have built in their homes have many options. Three of the most popular of these options are a home equity loan, HELOC and reverse mortgage for borrowers over 55. 

Home equity is the difference between the current value of your home and your remaining mortgage balance, or the amount of your home that you own outright. Most home loans that let you access your home equity will be second mortgages.  

Understanding how a reverse mortgage, home equity loan and HELOC differ can help you make the best choice for your goals and financial needs. Once you have made the decision on how to access your home equity, you will be ready to start an application for you home equity loan, reverse mortgage or HELOC. 

Home equity loans, HELOCs and reverse mortgages all allow borrowers to tap into their home equity. However, the way you access your home equity and pay back your loans are different for all three options.  

Understanding the differences among the three options will help you decide which one is best for your needs and financial situation. 

Home equity loans, also called Close End Seconds, give homeowners a one-time lump-sum based on the amount of equity they have in the home. Shortly after receiving your home equity loan, you will have to start repayment on both your loan principal and interest. 

A home equity line of credit (HELOC) offers homeowners access to the amount they own in their home. Borrowers can access however much they need to a certain limit. While accessing their HELOC, borrowers will only have to pay interest on the amount they access. After a few years of accessing your HELOC amount, you will have to repay your loan principal and interest without being able to make any additional draws. 

Older homeowners, typically age 62 and above, looking to take advantage of the value they have built in their home without selling can look into a reverse mortgage like a HECM. A HECM, or home equity conversion mortgage, can allow a homeowner to access their home equity while living in their home without needing to pay back their loan principal or interest. 

Here are a few differences among a reverse mortgage (HECM), home equity loan and HELOC so you can determine which option is best for you. 

Some of these differences can vary slightly based on your lender. 

• HECM: No fixed CLTV amount needed to access your funds. 
• Home equity loan: Potential maximum CLTV of 95%.
• HELOC: Potential maximum CLTV of 95%.

• HECM: These loans don’t typically have minimum credit scores or maximum DTI ratios to qualify.
• Home equity loan: A typical credit score minimum of 680 and maximum DTI ratio of 50%.
• HELOC: A typical credit score minimum of 640 and maximum DTI ratio of 50%.

• HECM: You can choose to access your funds as a lump sum through a line of credit or monthly deposits.
• Home equity loan: One-time lump-sum payment given shortly at origination.

• HELOC: Draw on a line of credit to access your funds as needed during the first years of your loan.

• HECM: No repayment is required while borrowers still occupy the home. Upon sale of or leaving the home, repayment will be required.
• Home equity loan: Payments on both loan principal and interest start shortly after your loan begins.
• HELOC: Only interest payments while making draws. After a draw period ends, you will have to make payments on both loan principal and interest.

The biggest factor in choosing among a home equity loan, HELOC or reverse mortgage is you and your needs.  

Consider how accessing and repaying the loans could be most beneficial to you and your financial situation. Also make sure that you look at the qualifications to see which options you could qualify for. 

After that, you will know the option that is right for you and will be ready to start an application for your home equity loan, reverse mortgage or HELOC. 

_{Applicant subject to credit and underwriting approval. Restrictions apply.} 

_{Information provided is for educational purposes only. It should not be construed as financial or legal advice or instruction. Rate does not guarantee or assume liability for the accuracy, completeness or timelines of the information. You should conduct additional research before making any mortgage related decisions.}