Family holding a tiny house representative of it's equity

Home Equity Loan vs. Reverse Mortgage

When mortgages first became popular back in the early 1900s, applying for a mortgage was a straightforward process. However, through the years, lending institutions have developed different types of mortgages to meet their customers’ needs. Some mortgages, like home equity loans and reverse mortgages, are used for the original purchase of the house while others draw from your home’s value. If you’ve wondered what they are, how they’re different, or when to use one or the other, read on!

What is a Home Equity Loan?

A home equity loan is a mortgage loan that provides you with a lump-sum cash payment based on the equity of your home. If you already have a mortgage on the home, then it’s called a second mortgage. A major benefit of home equity loans is that you can use the proceeds however you see fit, whether it’s for a bathroom remodel or an in-ground pool.

The amount you can borrow on a home equity loan is generally 80% of the value of the home, minus any amount you may owe. Based on the 80% equity value, if you own a home that’s valued at $100,000 and currently owe $50,000, you would qualify for a home equity loan of $40,000. If you want to see the math, that’s $100,000-$50,000 X .80 = $40,000. Just so you know, you are still required to have good credit before you can get a home equity loan. 

What is a Reverse Mortgage? 

A reverse mortgage is an attractive option to elderly people who own their own home and would like a steady source of income. The lender will pay you based on your home’s value. If you already have a mortgage on your home, the balance must be low enough that the lender can get enough equity. To qualify, you must meet these requirements:

  • Be at least 62 years old
  • Own the home
  • Live in the home
  • Must show ability to pay home fees such as insurance and taxes

You can also choose to get the money as monthly payments, as a line of credit, or as a lump sum. A major selling point for reverse mortgages is that the money does not have to be paid back until you die, sell your home or move out.

Differences: The Breakdown

When it comes down to it, the only thing that they really have in common is that they both allow you to tap into your home’s value. Home equity loans are generally for someone who want short-term cash that they can pay back, while reverse mortgages are for those who want a long-term supply of income that doesn’t need to be paid back. 

The interest on home equity loans is generally lower than reverse mortgages and reverse mortgages also typically have monthly insurance fees. That’s not even mentioning the different qualification requirements. It’s important to keep these loan types straight so you know which one to ask your lender for, and when.

Last Updated: July 12, 2017