Reverse Mortgage Loans vs Home-Equity Loans

Both reverse mortgage loans and home-equity loans can provide you with a way to tap into your home's equity. However, these loans have some unique features that you should know about. Here are the basics of reverse mortgage loans and home-equity loans and how they compare to one another.

Receiving Your Money

One of the biggest differences between these two types of loans is in how you receive your money from the lender. With a home-equity loan, you are going to get all of your money as soon as the loan is processed. The lender is going to give you a lump sum in the entire amount of what you are borrowing.

With a reverse mortgage loan, you are going to be able to access your money in a few different ways. One of the most common ways is by receiving regular monthly payments over the course of many years. You can also set up a line of credit with the lender to access the money whenever you want. In addition to these options, you could utilize smaller monthly payments and have access to a line of credit if you wish.

Making Payments

Another key area in which these two types of loans differ is in the payments that are required. With a home-equity loan, you are going to be required to start making payments immediately after you receive your money. You will make monthly payments to the lender over the course of several years to repay the amount that you borrowed. It is not uncommon to make payments for 10 to 20 years.

With a reverse mortgage, the process works completely differently. You are going to receive monthly payments from the lender until your equity has been exhausted. At that point, you do not have to start making any payments to your lender for the money that you borrowed. The money is not going to be repaid until you sell your house. It can also be repaid if the homeowner passes away and his beneficiaries use life insurance money to retire the debt.

Requirements

Another difference between these two types of loans is in who can qualify. Anyone can qualify for a home-equity loan as long as she has sufficient credit and income. For a reverse mortgage, your credit or income will not play a role in determining whether you can get the loan. To qualify for a reverse mortgage, you have to be at least 62 years old and you have to be dealing with your primary residence. Your house has to be paid off or have a very small mortgage balance that can be paid off with funds from the reverse mortgage.

Choosing One

Depending on your situation, one of these loans might be better for you than the other. If you are over the age of 62, the reverse mortgage makes a lot of sense because you do not have to worry about repaying it unless you sell your house. If you are not yet old enough, the home-equity loan can provide you with the funds that you need.