*This post was created in collaboration with Alpine Credits.
As a homeowner, the longer you pay into your mortgage, the more you’re building your investment. More specifically, you’re building equity that you can use to borrow money when you need cash for a purchase or a debt consolidation. There are a few different ways you can access your home’s equity, such as a HELOC or a reverse mortgage. Let’s dig deeper into a HELOC vs reverse mortgage, and when each may be appropriate.
Key Points
- Reverse mortgages and HELOCs are both loan types that let you tap into your home’s equity to cover a variety of expenses.
- A reverse mortgage is available to homeowners aged 55 years and older and allows homeowners to borrow up to 55% of their home’s appraised value.
- A HELOC is a revolving credit line that lets you borrow up to 65% to 80% of your home’s value.
- You can withdraw as much or as little money from your HELOC account as you need and only pay interest on the funds withdrawn, not the full credit limit.
HELOC Vs Reverse Mortgage
Like a personal loan, reverse mortgages and HELOCs are both financing options you can use to cover a big expense. However, these options allow homeowners to access the equity in their homes.
Equity refers to the value of your home that you own outright and is calculated by subtracting your loan balance from your home’s value. So, what exactly is the difference between a HELOC vs a reverse mortgage?
What Is A HELOC?
A home equity line of credit (HELOC) is a type of revolving credit based on the equity in your home. You’re granted access to a specific credit limit, which can be as much as 65% to 80% of your home’s current market value or purchase price.
You can draw from your HELOC whenever the need for extra cash arises, and interest is only charged on the withdrawn amount, not on the full credit limit. Once you repay what you’ve borrowed, interest will no longer accrue. Then, you can borrow over and over, up to your credit limit.
You are still required to continue making mortgage payments, as a HELOC is guaranteed by your home and is not related to your mortgage.
What Is A Reverse Mortgage?
A reverse mortgage is available to homeowners who are at least 55 years old. With a reverse mortgage, you can borrow up to 55% of your home’s current value.
Rather than making payments to your lender, you will receive payouts based on the equity in your home. In fact, you won’t have to make mortgage payments to your lender while you’re living in your home. However, other fees will continue to accrue, including interest, property taxes, and property insurance.
You’ll only need to make reverse mortgage payments if you move, sell your home, or pass away.
Where Can You Get A HELOC Vs. Reverse Mortgage?
The first place you may think of applying for a HELOC vs. reverse mortgage is a bank or credit union. These conventional lending institutions typically offer the most competitive interest rates, but they also tend to have more stringent lending requirements that you must meet to get approved. And if you’re applying with a credit union, you’ll first need to become a member.
If you’re looking for more flexible lending criteria, you may want to consider working with an alternative lender, like Alpine Credits. These lenders not only make it easier to get approved for a HELOC, but they also help you access your equity quickly. In fact, you can often get approved in as little as 24 hours or less, and then gain access to your funds shortly after.
What’s The Difference Between A HELOC Vs Reverse Mortgage?
HELOCs and reverse mortgages may both allow you to tap into your home’s equity, but there are several key differences between the two. The following chart provides a side-by-side comparison of various components of financing options:
| HELOC | Reverse Mortgage | |
| Maximum Loan Amount | Up to 65% to 80% of home’s current market value/purchase price | Up to 55% of home’s current value |
| Interest Rate | Variable(based on the prime rate) | Fixed or variable |
| Fees | – Admin fees – Appraisal fees – Legal fees – Title search fees – Discharge fees | – Appraisal fees – Setup fees – Legal fees – Title search fees – Prepayment penalty fees |
| Payment Requirements | No fixed repayments required(Only interest payments required on the funds withdrawn) | No repayment is required until loan is due |
| Age Requirement | Provincial/territorial age of majority(18 or 19+) | 55+ |
Pros And Cons Of A HELOC
Depending on your age and equity in your home, a HELOC may be the better option. But there are also some drawbacks of a HELOC to consider:
Pros
- Competitive rates. HELOCs typically come with variable rates, which are initially lower than fixed rates before they adjust, making this financial option more affordable for a short while.
- Easy access to funds. Once you’re approved for a HELOC, you can keep the account open and access it whenever the need for money arises.
- Pay interest only on the amount used. Instead of paying interest on the full credit limit, you’ll only pay interest on the funds you withdraw. Once you pay the borrowed money back, you’ll no longer pay interest fees.
- Interest-only payments. There are no fixed payments required. Instead, you only make repayments to pay off the interest portion charged on withdrawn funds.
- Bad credit is okay. If you work with an alternative lender like Alpine Credits, you may qualify for a HELOC with bad credit, as long as other aspects of your financial life check out. However, having good credit can help you qualify for better rates.
Cons
- Variable interest rates. While variable rates are generally lower than fixed rates, they can spike higher as the prime rate shifts.
- Risk of overspending. Since you have easy access to your home’s equity, you might find yourself tapping into your HELOC more than necessary if you don’t have a firm grip on your spending habits.
- Your property is at risk. Your home collateralizes your HELOC. If you default, your lender could repossess your house.
- Fees. HELOCs come with a bunch of upfront fees, such as admin fees, appraisal fees, and title search fees.
Pros And Cons Of A Reverse Mortgage
Reverse mortgages also come with their own set of benefits and drawbacks, including the following:
Pros
- No payments are needed. The biggest perk of a reverse mortgage vs. HELOC is that you don’t have any mortgage payments until you move, sell your home, or pass away.
- No income or credit score is required. Your ability to qualify for a reverse mortgage is based on your home, not your credit score or income.
- Choose between fixed or variable rates. Reverse mortgages can come with fixed or variable rates, while HELOCs only give you the option of variable rates. If you prefer the predictability of fixed interest rates, then a reverse mortgage may be a better option.
Cons
- Must be 55 or over. One of the hurdles of a reverse mortgage is that you must be at least 55 to qualify.
- Higher interest. Rates are usually higher on reverse mortgages compared to traditional mortgages and HELOCs.
- Homeownership expenses are still required. There are still several fees you have to pay, such as property taxes, insurance premiums, condo fees, origination fees, or other expenses related to maintaining your home.
- Your property can be seized. As may be the case with a HELOC, you risk having your home repossessed by the lender if you fail to pay all the fees mentioned above.
How Do I Calculate How Much I Can Borrow?
The amount you can borrow through a HELOC vs reverse mortgage is based on your home’s value, the equity in your home, and your overall finances. Generally, you can borrow up to 65% to 80% of your home’s value with a HELOC, minus your mortgage balance. And for a reverse mortgage, you can borrow up to 55% of your home’s value, less your outstanding balance.
To illustrate, let’s say your home is currently valued at $500,000 with $140,000 still outstanding on your mortgage. Your lender lets you borrow 65% of it through a HELOC. In this case, the most you can borrow would be $185,000, as illustrated here:
- $500,000 (home value) x 65% (percentage of equity you can borrow) = $325,000 (maximum equity you can borrow)
- $325,000 (maximum equity you can borrow) – $140,000 (outstanding mortgage) = $185,000 (total amount you can borrow)
Should You Use A Home Equity Line Of Credit (HELOC) Or A Reverse Mortgage?
Before choosing between a HELOC and a reverse mortgage, carefully weigh the pros and cons of each, as well as what they offer. One option may be better suited for you than the other, depending on your exact situation.
When Should You Use A HELOC?
A HELOC may be a better option in the following cases:
- You want frequent access to extra funds. If you think you’ll need to access your home’s equity several times over the next few years, then a HELOC may be more convenient rather than repeatedly applying for a loan.
- You’re uncertain about how much money you need. Since a HELOC gives you access to a credit account, you can borrow as much or as little money as you need without committing to a specific amount.
- You don’t want to be stuck with a repayment schedule. HELOCs are also great if you’d rather not be committed to regular installment payments. A HELOC comes with no fixed payments, and instead only requires minimum payments to be in good standing. The principal amount is only due after the withdrawal period is over.
When Should You Use A Reverse Mortgage?
A reverse mortgage is best suited in the following circumstances:
- You’re a senior without a lot of liquid cash. If you’re over 55 years of age and don’t have a lot of money in the bank, but have accrued lots of home equity, then a reverse mortgage may be a great option for you.
- You want to supplement your retirement income. If money is tight after retiring, you may be able to pay your monthly income through a reverse mortgage.
- You don’t want to sell your home to access equity. Instead of selling your home to liquidate your assets and improve their cash flow, a reverse mortgage allows you to stay in your home. Maintaining ownership will also allow you to have something of value to pass down to your beneficiaries as part of their inheritance.
Final Thoughts
If you have equity in your home and are in need of financial assistance, there are a few options to consider, including HELOCs and reverse mortgages. But while both involve accessing equity in your home, they each work quite differently. Be sure to assess both a HELOC vs reverse mortgage before deciding which avenue to take.
HELOC Vs Reverse Mortgage FAQs
What do I need to qualify for a reverse mortgage?
Can I get a home equity loan if I’m retired?
What can I use a home equity loan or reverse mortgage for?
Can I get a reverse mortgage with bad credit?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
