A Look into the “Reverse Mortgage” VS “HELOC” (Home Equity Line of Credit) 

You may have heard of reverse mortgages and the retirement option they can offer to individuals or couples who are “house rich, cash poor.” A reverse mortgage can be a valuable tool for those looking to tap into their home equity in retirement.

This article will compare the traditional HELOC (Home Equity Conversion Mortgage) and the HECM (Home Equity Conversion Mortgage).

What you may not know about Reverse Mortgages

There’s a lot more to be gained by getting a reverse mortgage in 2023. With new product rules in place and long, little-known benefits, a reverse mortgage is often positioned as a better option than a HELOC.

Rather than simply allowing interest to grow on the reverse mortgage loan to be paid off when the loan comes due, reverse mortgage holders can make payments toward the loan.

This allows them to keep the interest balance down and enjoy a growing credit line that expands over time.

With a Reverse Mortgage, You Can Also Make Repayments

A reverse mortgage is a loan; like most loans, it comes with the required interest. Unlike most loans, that interest does not need to be paid until the loan comes due—typically when the borrower moves from the home or passes away.

Qualifying borrowers 62 or older can receive payments from their home equity under a choice of payment plans or take the reverse mortgage as a line of credit.

But borrowers have another choice: paying the interest before it’s due. It may not be an intuitive option, but it can make a significant difference in the potential benefit of your home equity compared to a home equity line of credit.

Reverse Mortgage vs. Home Equity Loan Examples

Scenario 1. 

Jack takes home an equity line of credit at age 70. He has a $300,000 home and no existing mortgage.

The following approximations are possible for Jack’s HELOC: 

  • Jack can get up to $240,000 loan amount (up to 80% loan-to-value)
  • Jack decides to borrow $100,000 from his available line
  • Interest Rate: Prime + 2.00% amortized over 25 years, or roughly 5.50%
  • Mandatory monthly repayment would be $458/interest only or $614/fully amortized
  • Rate can change monthly
  • Closing costs: $0.00

Scenario 2: Jack takes a reverse mortgage as a line of credit at age 70. He has a $300,000 home and no existing mortgage.

He can opt to repay the interest over time, making monthly payments toward that interest, or defer the claim due to repay later.

The following approximations are possible for Jack’s reverse mortgage line of credit

  • Closing costs: $0.00
  • Jack can get up to $172,000 loan amount (up to 57% loan-to-value)
  • Jack decides to borrow $100,000 from his available line
  • Interest Rate: 1-year annual libor +2.75% – 5.1% fully indexed
  • If Jack “wanted to,” he could make a monthly repayment to the interest only of $425 or choose to make any additional repayment to the principle
  • The rate can only change 1 time per year

Reverse Mortgages Offer a Unique Credit Line Growth Feature 

Despite being able to borrow a larger amount under the home equity line of credit, he may be better off in the reverse mortgage line of credit scenario for several reasons.

First, Jack uses the credit line growth feature that Home Equity Conversion Mortgages (HECM) offers. Suppose a reverse mortgage credit line is left untouched. In that case, the unused portion will grow over time, allowing the borrower to access more home equity in the long run.

This can be a wiser option, particularly for younger borrowers just meeting the qualifying age of 62. Many financial planners today advise using a reverse mortgage credit line in this way.

Reverse mortgages also have new rules, including a financial assessment to help ensure borrowers meet their loan requirements. Research shows that retirees who use a reverse mortgage line of credit under this credit line options are less likely to run out of money in retirement than those who do not.

The line of credit was kept as a “rainy day fund” or simply as another “bucket” of money to draw from and replenish a proven strategy gaining appeal in 2016.

Relaxed Qualifications 

Under the reverse mortgage, there is no necessary monthly repayment versus the home equity line of credit that requires ongoing compensation. The reverse mortgage also may offer lighter qualifications, especially if the borrower has no existing mortgage and has a solid financial history.

The loan amount offered by a reverse mortgage line of credit may also be more appropriate for older borrowers, who would like to free up some additional cash flow, but may not be prepared to borrow (and repay) a large sum as made available by a HELOC option.

HELOC vs Reverse Mortgage Product Comparison

Compare FeaturesTraditional Home Equity Line of Credit (HELOC)Home Equity Conversion Mortgage (HECM)Proprietary Reverse Mortgage
Borrower Minimum Age186255
Line of Credit Term10 Years Lifetime 10 Years
May Be FrozenYes*No*Yes*
Line of Credit Growth RateNoFor Life7 Years
$0 Monthly Payment OptionNoYesYes
Income Requirements YesLimited Limited
Credit Score680+AnyAny
Reserves2-6 Months PITIAnyAny
Low/No Closing CostsNoNoYes
Fixed Interest RateNoNoNo
Common IndexPrime Rate TreasuryTreasury
*HELOC loans generally permit lenders to freeze or reduce a credit line if the home's value declines significantly. You must be prepared to make this “balloon payment” by refinancing, obtaining a loan from another lender, or using other means. You could lose your home if you cannot make the balloon payment.
Source: https://files.consumerfinance.gov/f/201204_CFPB_HELOC-brochure.pdf
**All line of credit programs may be frozen if you fail to maintain taxes and insurance or leave your home as your primary residence. If you enter bankruptcy, courts will not allow you to incur new debt while in BK proceedings, and therefore your line of credit during this time could also be frozen.

Reverse Mortgage vs. HELOC FAQs


What is the difference between a reverse mortgage and HELOC?

A HELOC is a line of credit that requires monthly payments and can be closed whenever the lender chooses. The reverse mortgage is insured and guaranteed to be available under the loan terms by HUD. The borrower is not required to make monthly repayments for as long as they live in the home and pays the taxes and insurance in a timely manner.

Which is better, a Home Equity Line of Credit or a Reverse Mortgage?

The better option will depend solely on an individual’s circumstances. A HELOC is typically less expensive to establish, benefiting those looking for short-term financing. On the flip side, a HELOC comes with several disadvantages as well. With a HELOC, you have mandatory monthly payments, and the available line of credit is not guaranteed. It can be frozen or eliminated at the lender’s sole discretion. The open-ended period (when you can draw funds) usually lasts only ten years. The mandatory monthly payments also increase significantly when you reach the recast period (usually at the end of 120 months).

The loan goes from interest only to principal and interest repayments to pay off over the remaining term. Failure to make timely payments can damage your credit and even result in foreclosure. A Reverse Mortgage will be more expensive to establish the loan as there is mortgage insurance due to HUD, so it is not designed to be a short-term financing solution as it is intended to be the last loan you ever need. With a Reverse Mortgage, your available funds, which can be accessed as a line of credit, scheduled monthly advances, initial cash disbursement, or even a combination of all 3, are guaranteed for as long as you live in the property by HUD. Your line of credit cannot be frozen or eliminated due to market fluctuations, and the unused line of credit grows in availability over time.

The funds remain available for as long as the loan is in good standing (the borrower lives in the property as a primary residence and maintains taxes and insurance). There are no mandatory monthly payments on a reverse mortgage, so you cannot damage your credit by missing a monthly payment. Voluntary payments are permitted without any prepayment penalty.


What makes a reverse mortgage line of credit a better option?

The reverse mortgage line of credit grows over time on the unused portion of the line. Not only can it not be closed by the lender, but the amount available to borrowers increases over time if you do not use all the funds available to you early in the term of the loan (HELOCS can be closed at any time the lender desires, even if you depended on the availability of the funds). Additionally, a reverse mortgage line of credit is available as long as the borrower lives in the property as their primary residence and maintains the taxes and insurance on the home. In contrast, a HELOC is usually only available for a maximum of 10 years.

What are the disadvantages of a reverse mortgage line of credit?

The disadvantage of a reverse mortgage is that it costs more to establish. If you want to pass the house down as a large inheritance and think you need help to make payments on the reverse mortgage, the asset you would pass would be less (however, this would also mean you should not get a HELOC either).

Are the qualifications different for reverse mortgages vs. HELOCs?

The qualifications are different for HELOCs and reverse mortgages in that reverse mortgages use a residual income method of qualification, vs. the HELOC utilizes an ability-to-repay approach. The residual income method looks at all the borrower’s outgoing debts subtracted from their income. The borrower must have a minimum amount left to live each month.

The ability to repay considers the borrower’s debts as a ratio of the borrower’s total income to determine the borrower’s ability to repay the obligation. The residual income method HUD employs for the reverse mortgage is much easier to qualify for most borrowers, especially those on fixed incomes.

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