Focus on Finance: Home equity versus reverse mortgage

Question: I’m retired and have a small first mortgage on my home. To access my home’s equity, is it better to get a home equity loan or a reverse mortgage?

Answer: As with any financial decision, your specific situation and goals should determine the best course of action for you.

Generally speaking, you can convert your home’s equity into cash with either a reverse mortgage or home equity loan because both are based on the home’s market value minus any liens or indebtedness secured by the property. While similar in that respect, these loans work very differently.

First, typical home equity loans allow you to borrow a lump sum or set up a line of credit, usually not to exceed the value of the home’s equity. Either of these options will require credit scores and sufficient regular income to qualify for the loan. With a lump sum option, there will be regular monthly installment payments over the term of the loan and based on the interest rate charged.

A home equity line of credit, or HELOC, initially gives the borrower access to a set maximum limit of money, again based on the home’s equity. The difference is repayment requirements are triggered when the borrower draws money from the line of credit. The monthly repayment amount depends on the outstanding balance and the interest rate charged.