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Differences Between a Reverse Mortgage and a Home Equity Loan

by Alica Espinoza
  • Overview

    Reverse mortgages and home equity loans are two ways to "make your home work for you." However, there are some significant differences between the two.
  • What is a Reverse Mortgage?

    A reverse mortgage is a kind of loan that uses the equity in a home to provide "income" to the borrower. The money can be distributed in one lump sum, or paid out in regular intervals. The given rule is that the borrower must use the home as the primary residence during the life of the loan.
 
  • What is a Home Equity Loan?

    A home equity loan uses the equity of the home as collateral for a lump sum payment. The terms of the loan are much like that of a mortgage and may carry points or mortgage insurance. Equity loans are generally for major home repairs, education costs or medical bills.
  • Requirements for Reverse Mortgages

    The borrower for a reverse mortgage must be 62 years of age or older. The borrower must also use the home as the principal residence. Once the home is no longer used as the principal residence, or if the borrower dies, the loan will be due for repayment plus interest and any fees.
  • Requirements for Home Equity Loans

    The borrower for a home equity loan must have good to excellent credit and equity in the home. The loan must be repaid as a mortgage and is very similar to a second mortgage, although it must be repaid over a shorter period of time than a traditional mortgage.
  • Information to Make the Best Decision

    If the borrower meets the requirements for both the reverse mortgage and the home equity loan, there are a few other things to consider. Information is available through the Federal Housing Administration (FHA), Department of Housing and Urban Development (HUD) and AARP to assist the borrower in making the best decision.

    References & Resources