• Reverse mortgages, home equity loans, and home equity lines of credit (HELOCs) all allow homeowners to convert some of their home equity into cash.
  • With a reverse mortgage, senior homeowners can collect money from the lender rather than making monthly payments to the lender.
  • While home equity loans and HELOCs are typically repaid in installments, reverse mortgages are typically repaid using proceeds from the eventual sale of the property.

Did you know that homeowners can leverage their home’s value to provide the funding needed to tackle unexpected expenses, complete a home renovation project, consolidate debt, or enjoy a comfortable retirement? 

For many homeowners, particularly those with a lot of home equity, this isn't just a dream. It's a reality made possible by reverse mortgages, home equity loans, and home equity lines of credit.

All three of these financial tools allow homeowners to convert some of their home equity into cash. And all three are secured loans, which use the home as collateral for the debt. However, there are several important differences between these options. 

This article will focus on the differences between reverse mortgages, home equity loans, and HELOCs, comparing their benefits and drawbacks, eligibility requirements, and financial implications of each. By understanding these options, you can make an informed decision that aligns with your financial goals and long-term plans. 

Reverse Mortgage

Reverse mortgages allow homeowners aged 62 or older to receive cash from their lender based on their home equity. These funds can come as a lump-sum payment, monthly payments, or a combination of the two.[1]

With a reverse mortgage, the homeowner retains the title to their home and continues to reside in the home as they borrow more and more against the property’s value. The debt accumulated by the reverse mortgage is typically repaid with interest and fees by selling the property once the owner is no longer able to live in the home. In this case, your heirs would be entitled to any remaining profit from the sale. Alternatively, they can simply turn the property over to the lender to satisfy the debt.   

If your heirs wish to keep the property, they could buy the home by repaying the loan balance (or 95% of the appraised value if that amount is lower than the balance). 

There are different types of reverse mortgages, but for the sake of simplicity, this article focuses on the most common type, home equity conversion mortgages (HECMs).[2]    

Pros and Cons of Reverse Mortgages

Reverse mortgages offer both positives and negatives.

Benefits of reverse mortgages:

  • Homeowners have access to money that can help support them in retirement.
  • The homeowner can continue living in his or her home.
  • Cash received from a reverse mortgage is not taxable because it is a loan, not income.
  • With a non-recourse clause, the lender cannot claim more than the property’s value, regardless of how much it pays out.

Possible downsides of reverse mortgages:

  • There are costs and fees for originating and servicing the loan. 
  • Reverse mortgage interest cannot be deducted for income tax purposes until it is repaid. 
  • While spouses are protected, anyone else living in the house may be displaced if they cannot repay or refinance the loan when the borrower vacates the property.   

Home Equity Loan

A home equity loan allows qualified homeowners to borrow against their home equity in a one-time, lump-sum arrangement. The loan is then repaid, beginning immediately, according to a set schedule, typically with a fixed interest rate.

Pros and Cons of Home Equity Loans

Here are the potential benefits and downsides of home equity loans.

Benefits of a home equity loan:

  • Home equity loans usually offer a fixed interest rate, allowing for predictable monthly payments.
  • The borrower receives a lump sum, so there are no ongoing account maintenance charges or annual fees.

Potential downsides of a home equity loan:

  • Borrowing too much could lead to unnecessary interest expenses, and borrowing too little could require applying for another loan.
  • Failing to repay the loan may result in foreclosure of the home.
  • The fees for originating a home equity loan may be higher than those needed to open a HELOC.
  • Interest is only tax deductible on the amount used to pay for home improvements.

Home Equity Line of Credit

A home equity line of credit allows qualified homeowners to borrow against their home equity as needed, within the limits of maximum loan amounts and “draw periods.” Repayment may begin immediately. However, some loans require only interest payments during the draw period, with the principal balance payments not due until a later “repayment period.”

Some lenders, like PNC Bank, offer specialty HELOC products that feature both fixed and variable rate options where Clients are able to "lock" and "unlock" the rate on qualifying balances at any time during the draw period. This gives you the flexibility to lock in a fixed rate on all or part of your variable-rate balance during the draw period. 

Pros and Cons of HELOCs

Here is a summary of the pros and cons of HELOCs.

Benefits of a HELOC:

  • The borrower can draw small increments on an as-needed basis. 
  • HELOCs typically offer higher borrowing limits and lower interest rates than credit cards.
  • Borrowers may qualify for an interest-only (IO) HELOC, requiring them to pay only interest during the draw period. 

Potential downsides of a HELOC:

  • HELOCs typically come with variable interest rates, so payments could increase if market rates rise. A HELOC with a rate lock option can prevent this automatic increase.
  • Interest is only tax deductible on the amount used to pay for home improvements.
  • Failing to repay the loan may result in foreclosure of the home.
  • In addition to the origination fees, there may be ongoing fees to maintain the line of credit.

Key Differences Between Reverse Mortgages, Home Equity Loans, and HELOCs

There are several differences between reverse mortgages, home equity loans, and HELOCs that homeowners should consider when choosing between the options. 

Eligibility Requirements

Eligibility requirements for home equity loans and HELOCs are very similar. Homeowners must:

  • Meet the credit requirements of the lender. This may include having the property appraised to confirm its current value.
  • Demonstrate the ability to repay the loan by providing proof of income.
  • Have enough equity to borrow against. Most lenders require homeowners to retain at least 15-20% equity beyond the borrowed amount.[3]

Eligibility requirements for reverse mortgages are much more complex. To qualify for a reverse mortgage, homeowners must typically:[4]

  • Be 62 or older. 
  • Live in the home as a primary residence.
  • Own the home free and clear. The first mortgage can be paid off before applying or if there is a small balance, the owner may be able to use funds from the reverse mortgage to pay off the first mortgage.
  • Be free of any federal debt, such as federal income taxes due or federal student loans. HECMs are insured by the Federal Housing Administration (FHA), which requires that reverse mortgage participants be free of all federal debts. As with first mortgages, federal debts with small balances may be repaid with funds from the reverse mortgage.
  • Maintain the home physically and financially. The property must be kept in good repair, and expenses such as property taxes, homeowner’s insurance, and any homeowner’s association dues must be paid in a timely manner.  
  • Receive counseling from a HUD-approved reverse mortgage counseling agency for HECMs. 

Impact on Home Equity and Ownership

With home equity loans and HELOCs, equity decreases as money is borrowed against the property, then increases again as payments are made on the debts.

With reverse mortgages, equity continues to decline until the loan becomes due and is repaid. 

Loan Terms and Repayment

Reverse mortgages do not have a pre-determined loan term. The loan extends so long as the borrower lives in the home and fulfills the terms of the agreement. The loan becomes due when the borrower vacates the property, is no longer able to financially or physically maintain it, or upon the death of the borrower. 

Home equity loans have agreed-upon loan terms and repayment schedules.  

HELOCs have agreed-upon draw periods and repayment periods. Repayment amounts vary, depending on interest rate changes and additional charges against the open line.  

Cost and Fees

Reverse mortgages, home equity loans, and HELOCs all come with various fees and expenses, which may include:

  • Application fees.
  • Appraisal expenses.
  • Loan origination fees.
  • Document preparation costs.
  • Title fees.
  • Attorney fees.
  • Recording costs.

Closing costs can vary widely between borrowers because of factors such as loan type, loan amount, and location. Generally, reverse mortgages carry higher costs than home equity loans and HELOCs.[5] Reverse mortgages may carry unique costs like the mortgage insurance premium (MIP), which is a fee that is charged at closing to guarantee that you will receive expected loan advances in the future. 

Some lenders, like PNC Bank, choose not to charge any upfront fees on their HELOC product for clients living in most U.S. States.

How To Choose Between a Reverse Mortgage, Home Equity Loan, and HELOC

When choosing a reverse mortgage vs. HELOC or home equity loan, consider the following factors:

  • Your financial needs. How much money do you need, and when do you need it?
  • Your long-term goals. How long do you plan to remain in your home? Do you want the home to stay in the family? 
  • The financial implications. How much will you pay in fees over the life of the loan?

Reverse Mortgage vs. Home Equity Loan or HELOC 

Reverse mortgages may be a good option for homeowners who:

  • Are at least 62 years old.
  • Plan to remain in the home long-term.
  • Live in a market where home values are increasing.

Home equity loans may be a good option for homeowners who:

  • Know exactly how much money they need.
  • Prefer the stability of fixed rates and a scheduled repayment plan.
  • Do not want to tempt themselves with an open line of credit.

HELOCs may be a good option for homeowners who:

  • Are unsure how much money they will need to borrow.
  • Are willing and able to budget for variable interest rates and changing balances.
  • Don’t need cash now but want an open line of credit for emergencies.

The Bottom Line

Reverse mortgages, home equity loans, and HELOCs all provide a way for homeowners to convert some of their home equity into cash. There are pros and cons to each method, so it’s worth investing some time to research and understand your options. You may also want to discuss these options with a financial expert so you can make your decision confidently. 

While PNC Bank does not offer Reverse Mortgages at this time, we do feature other Home Lending products that can help you strategically leverage your home’s equity (like our Choice HELOC or Cash-out Refinance products). Connect with one of our PNC Mortgage Loan Officers today to learn more about your Home Equity options.