Reverse Mortgage versus a Home Equity Loan

When you hear the phrase “reverse mortgage home equity loan” what comes to mind? Many people think these two financial products are one in the same. While there are similar aspects between a Reverse Mortgage and a Home Equity Loan, these two options are entirely different.

Differences between a Reverse Mortgage and Home Equity Loan

A home equity loan cashes out equity from your property. Interest rates are generally lower than non-secured loans, which is a benefit for the borrower.

With this type of financial product you put yourself at risk because you will have to make monthly payments – much like you would with a traditional mortgage. Begin missing payments and foreclosure could become a real possibility.

A reverse mortgage also takes advantage of the equity in your home. The main difference between this option and a home equity loan is that you are not required to make monthly payments. Instead, the loan must be paid back upon selling the home, making it a secondary residence, or upon your death.

With a reverse mortgage, qualifying is based on the amount of equity available and your age. But with a home equity loan, your credit score is also a determining factor. This is the case because the bank must trust that you will make timely, monthly payments.

It makes sense to opt for a home equity loan if you don’t need a lot of money, plan on moving from the home in the near future, or you do not qualify for a reverse mortgage.

On the other hand, a reverse mortgage makes sense for those who need money in retirement, plan on staying put for the long term (usually until death), and do not want to make a monthly payment.

You should now realize that a reverse mortgage and home equity loan are not the same. With both, you receive cash thanks to the equity in your home – but this is the only similarity.

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