Reverse Mortgage vs. Home Equity Loan: What’s the Difference?
Homeowners who want to access their home equity have two options: home equity loans and reverse mortgages, but there are some important distinctions between the two that you should be aware of. In order to help you decide which loan could be best for your case, we’ll compare a home equity loan with a reverse mortgage in this article, looking at things like eligibility requirements, maturities, and terms.
What is a Home Equity Loan?
This is a loan that leverages the equity in your home as security. You take out a lump sum loan, typically at a fixed interest rate, and repay the debt over a predetermined period of time. Depending on your circumstances, the interest on a home equity loan can be tax deductible, and you can use the money for anything you like, such debt consolidation or house upgrades.
What is a Reverse Mortgage?
Homeowners who are 62 years of age or older can turn some of their home value into cash. A reverse mortgage does not require regular payments like a home equity loan does. Instead, you pay back the debt when you sell your house, vacate, or pass away. Age, house value, interest rate, and other variables all affect how much you are eligible to borrow.
Qualifying For These Loans
The qualifying conditions for reverse mortgages and home equity loans are a significant distinction. You normally need to have a particular amount of equity in your property, a decent credit score, and a steady source of income to be eligible for a home equity loan. In contrast, you must be at least 62 years old, own your house outright or have a low mortgage balance that can be paid off with the money from the reverse mortgage, and remain in the property as your principal place of abode in order to qualify for a reverse mortgage.
Repaying These Loans
As said before, with a home equity loan, you’ll make payments on the loan on a monthly basis until the loan is due, which is often when you sell the property, move out, or pass away. With a reverse mortgage, you won’t make any payments until the loan is due.
Like with any mortgage, if you fall behind on payments for a home equity loan, you run the risk of foreclosure. As long as you use the home as your primary residence, pay your property taxes and insurance on time, and take care of any necessary repairs, a reverse mortgage lender is prohibited from foreclosing on your home.
How Much You Can Borow
A home equity loan allows you to borrow money up to a certain percentage of the value of your property (after deducting your current mortgage). With a reverse mortgage, however, the amount you can borrow is contingent upon the interest rate, the value of your home, and your age.
Associated Costs
There are costs associated with getting a home equity loan or a reverse mortgage, but the nature and size of those costs might differ widely. Application fees, origination fees, appraisal fees, and other closing charges may be associated with a home equity loan, whereas mortgage insurance premiums, servicing fees, and other closing costs may be associated with a reverse mortgage.
Loan Maturities
The maturity of the loans is another distinction. Reverse mortgages are paid off when you either pass away or stop living in the house, whereas home equity loans are normally repaid over a period of 5 to 30 years, depending on the loan terms. Furthermore, the terms of a home equity loan are set, which means that the interest rate and payment sum remain constant for the course of the loan. In contrast, the terms of a reverse mortgage can be either set or adjustable, and because interest is compounded over time, the loan balance may eventually increase.
In Conclusion
while reverse mortgages and home equity loans are both viable options for gaining access to your home’s equity, they do have some key distinctions. Reverse mortgages are better suited for senior homeowners who wish to access their home equity without making monthly payments, whereas home equity loans are best for borrowers who need a large sum of money and can make monthly payments. In order to choose the loan that is best for your particular financial circumstances, it is crucial to thoroughly study the eligibility requirements, maturity, and conditions of each loan if you are thinking about either of these possibilities.