Have you built up equity in your property or even paid it off in full? If the answer is yes, you might be able to tap into a reserve of cash that can fund home improvements or provide a source of income into retirement.

The question is: do you want a HELOC vs reverse mortgage?

Deciding on how you will access the equity in your home is a complex financial decision with many aspects to consider. Keep reading to learn more about how each product works and some tips for choosing the right one specifically for you. 

What is a Reverse Mortgage?

One of the simplest ways to tap into the equity built in your primary residence is through a reverse mortgage, but many people aren’t sure how this works. Think of it as the opposite effect of your traditional thirty-year mortgage. Instead of paying the lender for your right to eventually own the property, your lender will pay you for a stake in the property. 

As long as you continue to live in the home, you don’t have to make any repayments on the new loan. Some people choose to pay off accruing interest, but it isn’t mandatory.  

What’s in it for the lender who offers either monthly payments, one lump sum payment, or a line of credit? When you sell the home, pass away, or move out (even if it’s involuntary), the lender either receives payment for the loan or actually owns the property.

HECMs

There are several types of reverse mortgages to consider, with HECM being one of the most popular options on the financial market. A home equity conversion mortgage is popular because it’s insured by the Federal Housing Administration (FHA). 

They tend to offer low interest rates but have higher upfront fees for origination and mortgage insurance premiums. A HECM vs HELOC is important to consider because HECMs don’t require a monthly payment. 

Pros

Reverse mortgages have some serious benefits for those who qualify. They offer a source of tax-free income that you can use however you want. For those living in retirement on a low or fixed income, this can provide some flexible financial breathing room. Meanwhile, you’re able to stay in your home as long as possible. 

As a bonus, there are no monthly payments required for a reverse mortgage. 

Cons

While HELOCs are available to anyone with accrued equity in their properties, reverse mortgages are more exclusive.

To start, there may be age requirements for a reverse mortgage, with most lenders only qualifying people age 62 or older. Additionally, you will have to have serious equity in your home. Some lenders may require that you have the mortgage paid off in full. The only fee that you have to pay during this time is the loan interest (which isn’t tax deductible like traditional mortgage insurance).

Beneficiaries must pay off the lender in full upon your passing or the lender takes possession of the property.

What is a HELOC?

A home equity line of credit (HELOC) is more accessible than a reverse mortgage, while allowing homeowners to tap into the equity they have built up. You can borrow against the money you have invested in your home, using it to pay for whatever you need: a kitchen remodel, expensive medical debt, or anything else that you need cash for now. 

HELOCs are split into two phases: a borrowing period and a repayment period. The borrowing phase can last for several years and permits you to make interest-only payments during this time. Once this ends, you’ll enter the repayment phase, which treats your balance due as a type of second mortgage. 

Pros

The main draw of a HELOC is that your monthly payments are fairly low at the beginning. If you anticipate having more disposable income in the years to come, it might make sense to tap into the home equity now, with smaller short-term monthly payments in exchange for a second mortgage in the future. 

You may also pay less money in closing costs compared to reverse mortgages, especially HECMs. There are no requirements to withdraw the full value of your established equity. HELOCs allow you to borrow only what you truly need which minimizes future payments. 

Of course, another primary benefit is that your HELOC interest payments could be tax-deductible if you use the money to make improvements to the property. 

Cons

How much are you going to spend on interest with a HELOC? The exact number is hard to calculate because they usually have variable interest rates. In a strong economy when interest rates are low, this could be a great thing. But when interest rates spike, you could deal with payments that inflate quickly on a monthly, quarterly, or annual basis. 

The other major downside is that if you default on your payments, you could lose your home to foreclosure. 

HELOC vs Reverse Mortgage: Which is Best for You? 

If you meet the qualifications for a reverse mortgage and a HELOC, which one is the smartest financial move? What factors should you consider when thinking about whether to tap into the equity of your home?

First, you have to think through the qualifications homeowners are required to meet as it pertains to age. Reverse mortgages require a minimum age of 62 while HELOCs have no age requirements.

The second major difference lies in how much equity you have built up in your home. A reverse mortgage requires you to pay off the home in full (or to carry a very small balance). HELOCs only require you to have at least 20 percent equity.

Last but not least, you need to consider how much you want to borrow. Reverse mortgages allow you to borrow the full value of the property in a lump sum or regular payments while HELOCs will permit you to borrow only what you need. HELOCs are a much more targeted way to withdraw the equity in your home while reverse mortgages provide a source of income in your golden years. 

Plan Your Future Consilio Wealth Advisors

Taking advantage of your home’s equity can be an incredible advantage depending on your needs – but at the same time, you don’t want to risk losing a place to live. If you’re debating the best path forward and want expert advice on the matter, Consilio Wealth Advisors can help you with our fiduciary and wealth planning services. We work primarily with tech professionals to help you take full advantage of your unique compensation structure. Reach out today for a consultation!

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