HELOC vs. reverse mortgage

^{This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not currently offer home equity lines of credit (HELOCs) in all states and does not offer reverse mortgages in any state. Please talk with a Home Lending Advisor to see if HELOCs are available in your state. Any information described in this article may vary by lender.}

Quick insights

• A HELOC allows flexible borrowing with monthly repayment requirements, making it helpful for short-term needs or home improvement projects.
• A reverse mortgage provides income or a lump sum without monthly payments.
• Choosing between a HELOC and reverse mortgage depends on factors like your ability to make monthly payments and plans to stay in your home, among others.

When it comes to unlocking your home’s equity, two popular options are a home equity line of credit (HELOC) and a reverse mortgage. While both can provide financial relief, they work differently and suit different needs. Whatever those are, understanding the key differences between the two financial products could help you make the choice that’s right for you.

How a reverse mortgage works

A reverse mortgage enables homeowners, typically age 62 or older, to convert a portion of their home’s equity into loan proceeds. Money is typically sent in installments on a regular basis, such as each month. Homeowners do not have to repay money received this way until they sell the home or pass away. Any potential fees or penalties associated with reverse mortgages may vary by lender.

Reverse mortgages pros and cons

A reverse mortgage can be an appealing option for homeowners looking to tap into their home equity during retirement. Let’s discuss the pros and cons.

Pros of reverse mortgages

• No monthly payments: Unlike traditional loans, there are no monthly mortgage payments. The loan is repaid when you sell the home, move or pass away.
• Steady cash flow: Provides a reliable source of income, which can be used to cover living expenses, healthcare costs or other retirement needs.
• Stay in your home: You retain ownership of your home and can continue living there for as long as you meet the loan requirements (usually maintaining the home and paying property taxes and insurance).
• Flexible payout options: Choose how you want to receive the funds—lump sum, line of credit or monthly payments—depending on your needs.

Cons of reverse mortgages

• Decreases home equity: As the loan balance grows over time, your home equity diminishes, leaving less for your heirs or for future use.
• High fees and costs: Reverse mortgages often come with high upfront costs, including origination costs, closing costs and mortgage insurance premiums, which can reduce the amount you can borrow. Any potential fees may vary by lender.
• Complexity: The terms and conditions of a reverse mortgage can be complex. It may take time to fully understand how the loan works and how it could impact your financial future.
• Impact on inheritance: Since the loan is repaid when you sell the home or pass away, your heirs may inherit less than they would if the property was left unencumbered.
• Home maintenance requirements: You must continue to maintain the home, pay property taxes and keep up with insurance. Failing to do so could trigger a loan default.
• Changing needs: If your living situation changes, such as needing to move into assisted living, the reverse mortgage will need to be repaid, which could complicate your financial situation.

How a HELOC works

A HELOC is a type of revolving credit that allows homeowners to borrow against their home’s equity. After opening a HELOC, there’s usually an option to withdraw funds as needed over several years—sometimes 10 or more. You may be able to pay down what you borrow during this time, known as the draw period. After it ends, any money borrowed must be repaid, plus interest.

Key differences between Reverse Mortgages and HELOCs

Reverse mortgages and HELOCs are both financial products that allow homeowners to access equity in their homes. While both allow homeowners to tap into their property’s value, they differ in structure, eligibility and financial impact. Here’s an overview of the key differences.

Purpose

• HELOC: Flexible credit line for various uses
• Reverse mortgage: Primarily for seniors to access home equity without monthly payments

Eligibility

• HELOC: Good credit score (usually 620 or higher), verifiable income is required to prove you can repay the loan
• Reverse mortgage: May have to be 62+, no income or credit check, and the home must also be the borrower’s primary residence

Disbursement

• HELOC: Line of credit (borrow as needed)
• Reverse mortgage: Lump sum, monthly payments or line of credit

Repayment

• HELOC: Monthly payments (interest + principal after draw period)
• Reverse mortgage: No monthly payments, repaid when home is sold or homeowner moves

Interest rates

• HELOC: Typically variable and can increase or decrease
• Reverse mortgage: Fixed or variable (interest adds to loan balance)

Risk

• HELOC: Risk of foreclosure if unpaid
• Reverse mortgage: Loan balance growth (increases over time as interest and fees accumulate) and potential for foreclosure (if the borrower fails to meet the loan terms)

Pros and cons of HELOC

Before deciding if a HELOC is right for you, weighing the potential advantages and drawbacks can inform your choice to apply.

Pros of a HELOC

• Flexible borrowing: Borrow only what you need, when you need it, up to your credit limit.
• Lower interest rates: Typically lower than credit cards and personal loans.
• Interest-only payments: Many HELOCs allow interest-only payments during the draw period.
• Tax benefits: Interest may be tax-deductible if used for home improvements. Please consult with a tax professional or advisor.
• Access to large funds: Useful for significant expenses such as renovations or debt consolidation.

Cons of a HELOC

• Risk of losing your home: Your home is collateral, so failure to repay could lead to foreclosure.
• Variable interest rates: Rates can fluctuate, leading to unpredictable monthly payments.
• Fees and costs: May include appraisal, application and annual fees.
• Temptation to overspend: The access to funds could lead to over-borrowing.
• Repayment challenges: After the draw period, full repayment of principal and interest begins, which could strain finances without proper planning.

How to choose between a reverse mortgage and HELOC

Deciding between a reverse mortgage and a HELOC depends on your financial goals, age and long-term plans. Each loan option has unique implications, so you may want to consult with a financial advisor to determine the best fit for your situation.

Here are several scenarios which might have a more suitable option:

When a reverse mortgage may be better

• You’re 62 or older and want to eliminate monthly mortgage payments while staying in your home.
• You need a steady source of income or a lump sum to supplement retirement.
• You don’t plan to leave the home as an inheritance or are comfortable with the remaining equity being used to repay the loan.
• You’re concerned about your ability to make monthly payments on a HELOC in the future.

When a HELOC may be better

• You’re under 62 or don’t meet the eligibility requirements for a reverse mortgage.
• You need flexibility to borrow only what you need and repay over time.
• You’re planning to use the funds for short-term financial needs or home improvements.
• You want to preserve more of your home equity for inheritance or future use.

In conclusion

A HELOC provides a source of revolving credit, and what you borrow doesn’t have to be repaid until the set repayment period. A reverse mortgage, on the other hand, offers a source of income that is repaid when the homeowner moves or the home is sold. Choosing between the two options depends on your financial needs, goals, circumstances and eligibility.

Before considering a reverse mortgage, it’s important to thoroughly understand the terms and consult with a financial advisor or housing counselor to determine if it’s the right option for your financial situation and goals.