What Is the Difference Between a Home Equity Line of Credit (HELOC) and a Reverse Mortgage?

Reverse mortgages and home equity lines of credit (HELOCs) let borrowers turn their home’s equity into cash to cover various expenses. The main differences include how you receive the money and how and when you pay the loan back. Reverse mortgages are settled when the borrower dies or moves out of the home, with no payments required while they’re alive and living in the home. Home equity lines of credit have minimum payments that can fluctuate.

Reverse mortgages are only available to borrowers who are aged 62 and older. They also need to either own the home outright or have at least 50% equity in it. HELOCs are available to homeowners of all ages, but they also require enough available equity in the home.

Receiving Money From Reverse Mortgages and Home Equity Loans

The amount of money available through a reverse mortgage depends on several factors, including the youngest borrower’s age, home value, amount of equity available and interest rate for the loan. Reverse mortgages offer multiple options for receiving money, including:

• Lump sum
• Equal monthly payments as long as the borrower lives in the home
• Equal monthly payments, plus a line of credit
• Term payments with equal monthly payments for a preset length of time
• Term payments, plus a line of credit
• Line of credit

A home equity line of credit is also capped at a percentage of the home’s value minus the amount owed on the mortgage. Instead of a lump sum, the borrower gets a line of credit of up to the maximum borrowing amount. They can access money up to the limit as needed. As the borrower pays it off, they can access more cash, so the balance can fluctuate regularly.

Paying Back the Amount Borrowed

With a reverse mortgage, the borrower receives money from the lender without making payments on it. The loan balance increases as the borrower receives money and the fees and interest accumulate. Reverse mortgages are paid when the borrower no longer lives in the home, such as if they die or move. Heirs can sell the home to pay off the loan, pay the loan in cash or refinance to keep the home. 

With a HELOC, the balance and minimum payments often fluctuate as the borrower takes out more money or pays off the principal. They typically have variable interest rates, which can also change the payments. HELOCs have a draw period, during which the borrower can take out money. Only the interest has to be paid during this time. During the repayment period, the payments can go up significantly if the borrower didn’t pay toward the principal during the draw period. It’s also paid with loan proceeds when the house sells or can be paid off by heirs upon the borrower’s death.