Equity Home Loan vs. Reverse Mortgage

Equity Explained

The equity in your home is the amount of money your home is worth minus the amount of money you owe on your mortgage and any other loans attached to the home. Equity can be a tricky thing since the amount of money your home is supposedly worth can fluctuate according to the real estate market. Although some financial experts suggest homeowners utilize the equity in their home as much as possible (for home improvements, investing, buying a car, debt consolidation), it is generally much more practical to leave the equity in your home alone until you really need it.

Equity Home Loans Explained

An equity home loan cashes out some of the equity in your home. Sometimes the interest paid on an equity home loan can be tax deductible. This kind of loan can come in one lump sum (Equity Loan) or in the form of a line of credit (ELOC or HELOC). Interest rates with these loans are usually lower than non-secured loans, but utilizing your equity means you put yourself at a risk for foreclosure if you don't make your monthly payments in a timely manner.

Reverse Mortgages Explained

Reverse mortgages utilize the equity in your home to give you either a lump sum of money or a line of credit, but there are no monthly payments. Instead, the loan becomes payable upon the death of the borrower(s) or upon moving out of the home as a primary residence. There are qualifying factors necessary to become eligible for a reverse mortgage. Applicants' credit scores do not matter as much as their age and the amount of equity in their homes.

Equity Home Loan vs. Reverse Mortgage Comparison

Although every situation is different, here are some general guidelines to help you decide which home loan program is right for you.

You May Want to Consider an Equity Loan If…

• You do not qualify for a reverse mortgage
• You want a relatively small amount of money which you intend to pay off quickly
• You do not anticipate staying in the home for much longer

You May Want to Consider a Reverse Mortgage If…

• You qualify for a reverse mortgage and:
  • You are looking to supplement your retirement income
  • You cannot afford to make the monthly payment for an equity loan
  • You want access to money that you aren't sure you will really ever need to use

There are plenty of other scenarios which are not covered here, and it is important to weigh your options carefully before committing to one loan over the other. Find a reputable lender that has representatives who will take the time to explain each available product to you in detail, and also help you decide which product is best for your individual situation.

Pros and Cons

You may be in a situation where you qualify for both loan products, and you just aren't sure which one to choose.

Pros

• The interest paid on equity loans may be tax deductible.
• The income earned from reverse mortgages may be tax free.
• There are usually little or no closing costs associated with an equity loan.

Cons

• Reverse mortgages can have expensive closing costs.
• Equity loans are sometimes difficult to obtain if you have a low credit score.
• You may wind up leaving less money to your heirs with a reverse mortgage, although that can be said of any debt.

This is certainly not an exhaustive list of pros and cons, but these items should assist you in asking the right kinds of questions to lender representatives while in the process of trying to decide on which product to choose. Never accept a loan which you do not fully understand.