Understanding Reverse Mortgages vs Home Equity Loans: Which Unlocks Your Home's Value?

For most Americans, their home represents the single largest asset they’ll ever own. The equity built into that property—what remains after subtracting any outstanding mortgages or liens—comprised 45% of median net worth for U.S. homeowners in 2021, according to research from the Pew Research Center. Unlocking this wealth when you need cash is possible, but understanding your options is crucial before making a decision.

The Three Ways to Access Your Home’s Equity

If your home is valued at $250,000 and you owe $100,000 on your mortgage, you have $150,000 in equity available. That equity can serve as collateral for various types of loans. However, tapping into home value isn’t instantaneous—each method requires approval and comes with distinct terms, fees, and implications for your finances and future.

Three primary options exist for homeowners seeking to convert equity into accessible funds: reverse mortgages, home equity loans, and home equity lines of credit. Each operates on different principles and serves different financial situations.

Reverse Mortgage: Income Without Monthly Payments

A reverse mortgage fundamentally differs from traditional borrowing. This option is restricted to homeowners aged 62 and older, making it a retirement-focused strategy. The distinguishing feature: you receive payments from the lender rather than making payments to them.

The lender might provide a lump sum, establish a credit line, or distribute monthly payments—with zero obligation to repay while you occupy the home. Repayment becomes due only when you pass away, relocate, or sell the property. For FHA-backed mortgages, lending limits typically reach around $417,000, though high-cost regions like Alaska and Hawaii may allow up to $625,500. Origination fees generally range from $2,500 to $6,000 through FHA lenders, though non-FHA institutions may have different structures.

This option suits those who are “house-rich but cash-poor”—seniors with substantial home value but limited liquid resources. The appeal is clear: steady retirement income without the burden of monthly obligations. However, the drawback is significant: your heirs typically cannot inherit the home, as it must be sold to repay the loan balance.

Home Equity Loan: Large Lump Sums with Predictable Terms

Think of a home equity loan as a second mortgage. Unlike a reverse mortgage, there’s no age restriction, and you receive the full borrowed amount upfront. You then repay this lump sum over a predetermined period, much like a traditional first mortgage.

The proceeds can address virtually any expense—renovations, debt consolidation, education costs, or emergency expenses. Lenders typically cap borrowing at 80% to 85% of your home’s equity, though some may offer higher percentages. Terms generally include fixed interest rates, providing payment predictability, though some lenders introduce variable rates, balloon payments, or prepayment penalties.

This structure works best when you need a substantial, one-time infusion of cash with known expenses. A homeowner planning a major renovation with a definite budget, for example, benefits from the certainty these loans provide. Interest rates and fees vary by lender, so shopping around is essential.

HELOC: Flexibility for Uncertain or Evolving Needs

A Home Equity Line of Credit functions more like a credit card than a traditional loan. Rather than receiving a fixed amount, you gain access to a credit line secured by your home’s equity. You draw against this line only as needed, paying interest solely on the amount withdrawn.

Most HELOCs feature two phases: a draw period (commonly 10 years) during which you can access funds and pay interest-only, followed by a repayment period (often 20 years) when you must repay principal and interest. Some borrowers can renew their HELOC at draw period’s end rather than transition to repayment.

This approach excels when expenses are uncertain. Homeowners planning renovations with unclear final costs, or those anticipating multiple future needs, find HELOCs attractive for their flexibility. Variable APRs are common, so rates may fluctuate over time. Fees and rates differ across lenders.

Making Your Decision: Which Option Fits Your Situation?

The choice between a reverse mortgage and home equity loan—or a HELOC—depends on your age, financial needs, timeline, and long-term plans.

Choose a reverse mortgage if:

• You’re at least 62 years old
• You need ongoing income without monthly payment obligations
• You don’t plan to leave the home to heirs
• You have sufficient resources for property taxes and maintenance

Choose a home equity loan if:

• You need a substantial amount immediately
• Your expenses are well-defined
• You prefer predictable, fixed payments
• You want certainty about your borrowing costs

Choose a HELOC if:

• You need flexible access to funds over time
• Your expenses may vary or evolve
• You prefer paying interest only on what you use
• You value the ability to access funds as circumstances change

What If Your Credit Score Is Challenged?

Reverse mortgages tend to be most forgiving of lower credit scores. Since no monthly payments are required while living in the home, lenders sometimes extend approval to borrowers with less-than-perfect credit. However, the age 62+ requirement eliminates this option for younger homeowners.

Even with reverse mortgages, lenders will scrutinize your financial picture. They need assurance you can cover property taxes, insurance, and maintenance—expenses that remain your responsibility regardless of the loan type.

Home equity loans and HELOCs typically demand good to excellent credit from most mainstream lenders. However, with numerous lenders in this market, some specialize in working with borrowers carrying lower credit scores. Shopping across multiple institutions significantly increases your chances of finding favorable terms, regardless of your credit history.

The decision between accessing equity through a reverse mortgage or home equity loan ultimately hinges on your specific circumstances, timeline, and financial goals. Each solution offers distinct advantages for different life stages and financial situations.