If you have built up equity in your home and want to access some of that money, two options you may be considering are a reverse mortgage and a home equity line of credit, commonly called a HELOC.
Both allow you to borrow against the equity in your home, but they work very differently.
A HELOC generally requires monthly payments, while a reverse mortgage may allow qualified homeowners to access equity without required monthly principal and interest payments.
That difference alone can have a significant impact on your finances, especially if you are retired or approaching retirement.
However, that does not automatically make a reverse mortgage the better option.
The right choice depends on your age, income, existing mortgage, how much equity you have, and what you are trying to accomplish.
Let’s look at how both options work, their advantages and disadvantages, and when one might make more sense than the other.
What Is a Reverse Mortgage?
A reverse mortgage is a loan designed for older homeowners that allows them to access a portion of their home equity.
The most common reverse mortgage is the Home Equity Conversion Mortgage, or HECM, which is insured by the Federal Housing Administration (FHA).
To qualify for a HECM, at least one borrower must be 62 or older, and borrowers must meet the program’s other requirements.
Some proprietary reverse mortgage programs may be available to homeowners as young as 55, depending on the lender, program, and state.
One of the biggest differences between a reverse mortgage and a traditional mortgage is that monthly principal and interest payments are not required as long as the borrower continues to meet the loan requirements.
That does not mean the loan is free or that there are no financial responsibilities.
You are still responsible for:
- Property taxes
- Homeowners insurance
- Maintaining the property
- Living in the home as your primary residence
- Meeting the other requirements of the loan
Interest and applicable loan charges accumulate over time, which means the balance generally increases if you do not make voluntary payments.
The loan typically becomes due when the home is sold, the borrower permanently moves out, or the last borrower passes away, subject to applicable protections for eligible non-borrowing spouses.
You also retain ownership of the home. The lender does not take title simply because you have a reverse mortgage.
For more information, visit my How a Reverse Mortgage Works page.
What Is a HELOC?
A Home Equity Line of Credit, or HELOC, is a revolving line of credit secured by your home.
It works somewhat like a credit card, except your home serves as collateral.
A lender approves you for a credit limit based on factors such as your home’s value, existing mortgage balance, credit history, income, and other financial obligations.
You can generally borrow from the available credit line as needed during what is called the draw period.
For example, suppose you are approved for a $100,000 HELOC.
You might initially borrow $20,000 for home improvements and leave the remaining $80,000 available for future expenses.
You would typically pay interest only on the amount you actually borrow, rather than the entire $100,000 credit limit.
However, HELOCs generally require monthly payments.
Many have variable interest rates, which means your payment can change as interest rates move.
HELOCs also have a limited draw period, commonly around 10 years, followed by a repayment period.
When the draw period ends, your monthly payment may increase substantially because you must begin repaying principal as well as interest, depending on the loan terms.
Reverse Mortgage vs. HELOC: Side-by-Side Comparison
Although both loans use your home equity, the differences are important.
| Feature | Reverse Mortgage (HECM) | HELOC |
|---|---|---|
| Minimum age | 62 | Generally no age minimum |
| Monthly principal & interest payments | Not required | Required when a balance is owed |
| Income qualification | Financial assessment and residual income requirements | Generally based on income, debts, and credit |
| Credit requirements | Credit history reviewed; no universal minimum HECM credit score | Typically more dependent on credit |
| Interest rates | Fixed or adjustable, depending on payment option | Usually adjustable |
| Access to funds | Line of credit, monthly advances, lump sum, or combination, subject to program rules | Revolving line of credit |
| Credit line growth | Unused HECM line may grow | No comparable automatic growth feature |
| Repayment | Generally when a maturity event occurs | Monthly payments and repayment term |
| Upfront costs | Often higher, including FHA mortgage insurance | Often lower, but varies by lender |
| Home ownership | You retain title | You retain title |
| Existing mortgage | Generally must be paid off at closing | Often remains in place |
| Property taxes & insurance | Required | Required |
| Impact on equity | Balance generally increases without payments | Balance can decrease through repayment |
This comparison is based primarily on FHA-insured HECM reverse mortgages. Proprietary reverse mortgage programs and individual HELOC products may have different features.
The Biggest Difference: Monthly Mortgage Payments
For many homeowners, the most important difference between a reverse mortgage and a HELOC comes down to monthly cash flow.
With a HELOC, you generally need enough income to make the required payments.
With a reverse mortgage, qualified homeowners can access equity without adding a required monthly principal and interest payment.
This can be particularly important for someone living on Social Security, a pension, or retirement savings.
Example: A Retired Homeowner With $500,000 in Equity
Suppose a homeowner is 72 years old.
Their home is worth $700,000, and they owe $200,000 on their existing mortgage.
That leaves approximately $500,000 in equity.
They want to eliminate their existing mortgage payment and have additional funds available for future expenses.
Option 1: HELOC
The homeowner might qualify for a HELOC, depending on income, credit, and the lender’s requirements.
However, the existing $200,000 mortgage remains in place.
If they draw additional funds from the HELOC, they generally have another monthly payment to make.
That could increase their monthly expenses at a time when their income is relatively fixed.
Option 2: Reverse Mortgage
With a reverse mortgage, the available proceeds would first be used to pay off the existing $200,000 mortgage, provided the homeowner qualifies for sufficient proceeds.
That eliminates the required monthly principal and interest payment on the existing mortgage.
Depending on the homeowner’s age, interest rates, loan costs, and other factors, additional proceeds may be available as a line of credit or another permitted payment option.
The homeowner would still be responsible for property taxes, homeowners insurance, maintenance, and meeting the loan requirements.
The reverse mortgage may improve monthly cash flow, but the outstanding balance would generally grow over time.
This is why it is important to look at the entire financial picture rather than simply comparing interest rates.
How a Reverse Mortgage Line of Credit Differs From a HELOC
One feature that many homeowners are unfamiliar with is the reverse mortgage line of credit.
An adjustable-rate HECM can provide a line of credit that works differently from a traditional HELOC.
With a HELOC, your available credit generally increases when you repay what you borrowed.
However, your credit limit does not automatically grow simply because time passes.
With a HECM line of credit, unused borrowing capacity can grow over time based on the applicable growth rate.
Example of HECM Line of Credit Growth
Suppose a homeowner has $100,000 available in an unused HECM line of credit.
For illustration, assume the applicable credit line growth rate remains at 6% annually.
After one year, the unused line could increase to approximately $106,000.
After five years, it could grow to approximately $133,823, assuming annual compounding at that constant rate.
These are hypothetical figures. Actual growth is calculated under the loan’s terms, and the growth rate can change over time.
This growth does not represent interest earned in a bank account.
Instead, it represents an increase in the amount the homeowner may be able to borrow.
That distinction is important.
The homeowner is not receiving investment earnings or accumulating cash in a savings account.
The HECM line of credit is still borrowed money, and any funds withdrawn increase the outstanding loan balance.
For homeowners who do not need immediate access to all their available equity, this feature can be worth considering.
Read more on my Reverse Mortgage Line of Credit page.
Can a HELOC Be Frozen or Reduced?
Yes.
One concern with traditional HELOCs is that the lender may have the ability to freeze or reduce available credit under certain circumstances.
For example, a significant decline in property value or certain changes in the borrower’s financial circumstances may allow a lender to limit additional advances.
That can become a problem if you were counting on the line of credit for emergencies or future expenses.
An FHA-insured HECM line of credit operates under different rules and includes federal protections.
The available line is not generally subject to the same discretionary freezes or reductions due solely to declining property values or changes in financial circumstances.
However, access to funds still depends on the loan remaining in good standing, compliance with program requirements, and any applicable disbursement limitations.
A reverse mortgage is not an unrestricted source of funds.
Which Loan Is Easier to Qualify For?
Qualification is another major difference.
A traditional HELOC generally places significant emphasis on your credit score, income, debt-to-income ratio, and existing obligations.
For a retired homeowner with substantial equity but limited monthly income, that can create challenges.
A HECM reverse mortgage is evaluated differently.
Rather than qualifying you based on your ability to make monthly principal and interest payments, the lender performs a financial assessment.
That assessment may include:
- Credit history
- Income and available financial resources
- Property tax payment history
- Homeowners insurance payment history
- Existing debts
- Residual income
- Ability to meet ongoing property obligations
A homeowner with imperfect credit may still qualify for a reverse mortgage.
In some cases, the lender may require a portion of the proceeds to be set aside for future property taxes and insurance.
This is commonly called a Life Expectancy Set-Aside, or LESA.
The important point is that reverse mortgages and HELOCs are underwritten differently.
Someone who has difficulty qualifying for a HELOC may still have reverse mortgage options, although approval is never guaranteed.
See my Reverse Mortgage Requirements page for more details.
What Are the Costs of a Reverse Mortgage Compared to a HELOC?
Cost is one area where a HELOC may have an advantage.
Traditional HELOCs can have relatively low upfront costs, and some lenders offer programs with reduced or waived closing fees.
However, the interest rate, annual fees, early closure penalties, and other costs can vary considerably.
A HECM reverse mortgage generally has higher upfront costs.
These may include:
- Loan origination fees
- Appraisal fees
- Title and settlement fees
- FHA upfront mortgage insurance
- Other closing costs
A HECM also includes ongoing interest and FHA mortgage insurance charges.
Many of these costs can be financed into the loan, which may reduce the amount of cash needed at closing but increases the outstanding balance.
A HELOC may be less expensive if you only need to borrow a modest amount for a short period and can comfortably make the required payments.
On the other hand, if your goal is to eliminate an existing mortgage payment and improve retirement cash flow, a reverse mortgage may offer benefits that a HELOC cannot provide.
Neither option should be judged solely by its advertised interest rate.
The total cost, repayment obligations, and effect on your long-term equity all matter.
What Happens to Your Home Equity?
Both loans affect your home equity, but in different ways.
With a HELOC, making principal payments reduces the outstanding balance.
Over time, that can help restore your equity, assuming the property’s value remains stable.
With a reverse mortgage, the loan balance generally increases if you do not make voluntary payments.
Interest and certain fees are added to the outstanding balance, which can reduce the equity available to you or your heirs.
That is one of the most important tradeoffs to understand.
A reverse mortgage may provide better monthly cash flow today while reducing the amount of equity remaining in the future.
That does not make it inherently good or bad.
It depends on your priorities.
Some homeowners want to preserve as much equity as possible for their children.
Others would rather use some of the equity they have accumulated to make retirement more comfortable.
Both are reasonable goals.
For more information about how these loans affect inheritance, visit Reverse Mortgages and Heirs.
When Might a HELOC Be the Better Choice?
A HELOC may make more sense when you have sufficient income, qualify for favorable loan terms, and are comfortable making monthly payments.
For example, a HELOC might be preferable if:
- You only need to borrow money for a short period.
- You have reliable income to support the payments.
- You want to pay down the balance quickly.
- You want to preserve more equity by reducing principal.
- You have an existing mortgage with a favorable interest rate that you do not want to replace.
- You want a potentially lower-cost borrowing option.
Consider a homeowner who is 65, still working, and earns $150,000 annually.
They have a low-interest first mortgage and want $40,000 for home renovations.
If they qualify for a competitive HELOC and intend to repay the balance within a few years, a reverse mortgage may be unnecessary and considerably more expensive.
This is why I would not automatically recommend a reverse mortgage simply because someone meets the age requirement.
When Might a Reverse Mortgage Be the Better Choice?
A reverse mortgage may be more attractive when a homeowner is retired, has significant home equity, and wants to improve monthly cash flow without adding another required principal and interest payment.
Situations where it may be worth considering include:
- You want to eliminate an existing monthly mortgage payment.
- You have substantial home equity but limited retirement income.
- You want a line of credit available for future expenses.
- You plan to remain in your home for many years.
- You want to reduce the need to withdraw money from retirement accounts.
- You do not want required monthly principal and interest payments.
- You have difficulty qualifying for traditional home equity financing.
For example, a 75-year-old homeowner with a $1 million home and a relatively small remaining mortgage may have very different priorities than someone who is 62 and still working full-time.
The 75-year-old homeowner may be more concerned with reducing monthly expenses and maintaining financial flexibility.
A reverse mortgage might fit those goals, provided the costs, available proceeds, and long-term consequences make sense.
Can You Have a HELOC and a Reverse Mortgage at the Same Time?
Generally, an existing HELOC must be paid off as part of a new HECM reverse mortgage transaction.
A HECM usually must be in the required first-lien position, so an existing mortgage or HELOC cannot simply remain outstanding in front of it.
For example, suppose your home is worth $800,000.
You owe $100,000 on your first mortgage and have a $50,000 balance on a HELOC.
If you qualify for a reverse mortgage, the new loan generally needs to pay off both balances, totaling $150,000, along with applicable loan costs.
Any remaining available proceeds could potentially be accessed according to the reverse mortgage’s payment options and disbursement rules.
Whether the transaction works depends on the amount of reverse mortgage proceeds available.
Having a HELOC does not automatically disqualify you from getting a reverse mortgage.
However, the balances must be considered when determining whether enough equity is available.
What If One Spouse Is Younger Than 62?
This is an important consideration for married homeowners.
For an FHA-insured HECM, a borrower must be at least 62 years old.
However, having a spouse younger than 62 does not necessarily prevent the older spouse from qualifying.
The younger spouse may be treated as an eligible non-borrowing spouse if the applicable program requirements are met.
This can affect the amount of available proceeds and what happens after the borrowing spouse passes away.
Eligible non-borrowing spouses may receive certain protections allowing them to remain in the home following the borrower’s death, provided all applicable conditions are satisfied.
Those protections do not necessarily give the younger spouse the right to continue drawing funds.
If this situation applies to you, I recommend reading my detailed guide:
Reverse Mortgage With a Younger Spouse: What You Need to Know.
What Happens When You Sell the Home?
With either loan, the outstanding balance generally must be repaid when the home is sold.
The difference is how that balance may have changed over time.
With a HELOC, regular principal payments may have reduced what you owe.
With a reverse mortgage, the balance may have increased because of accumulated interest and fees.
However, FHA-insured HECM reverse mortgages include an important protection.
They are non-recourse loans.
That generally means neither the borrower nor their estate is personally responsible for a deficiency if the property is sold for less than the outstanding loan balance, provided the applicable requirements are satisfied.
HELOCs do not provide that same FHA HECM non-recourse protection. Borrower liability for a deficiency depends on applicable law and loan terms.
The homeowner or heirs may still retain any remaining equity after the loan and selling expenses have been paid.
Frequently Asked Questions About Reverse Mortgages vs. HELOCs
Is a reverse mortgage better than a HELOC for retirees?
It can be, particularly for retirees who want to eliminate existing mortgage payments or avoid taking on additional required monthly principal and interest payments.
However, reverse mortgages typically have higher upfront costs and allow interest to accumulate over time.
A HELOC may be better for someone with adequate income who wants short-term financing and intends to pay it back quickly.
Can you get a reverse mortgage if you already have a HELOC?
Yes, potentially.
However, the existing HELOC generally must be paid off as part of the reverse mortgage transaction.
The available proceeds must be sufficient to satisfy existing liens and meet the applicable loan requirements.
Does a reverse mortgage line of credit grow over time?
An unused HECM line of credit can grow over time based on the applicable growth rate.
This increases potential borrowing capacity rather than creating investment income.
Actual growth depends on the loan terms, interest rates, and available credit.
Does a HELOC affect Social Security benefits?
Borrowed HELOC funds are generally not considered taxable income and ordinarily do not affect Social Security retirement benefits.
Similarly, reverse mortgage loan proceeds generally are not considered taxable income.
However, needs-based benefits such as Supplemental Security Income (SSI) or Medicaid may be affected by how borrowed funds are held or used. Consult a qualified benefits advisor or tax professional when necessary.
Can you make payments on a reverse mortgage?
Yes.
Although monthly principal and interest payments are generally not required, homeowners may make voluntary payments to reduce the outstanding balance.
For an adjustable-rate HECM line of credit, principal repayments may also restore borrowing capacity under the applicable loan terms.
Which is safer, a HELOC or a reverse mortgage?
Both are loans secured by your home, and both carry risks.
With a HELOC, failing to make required payments could lead to foreclosure.
With a reverse mortgage, failing to pay property taxes, maintain insurance, occupy the home as required, or meet other loan obligations can also result in foreclosure.
The safer choice depends on your ability to meet the requirements and whether the loan fits your long-term financial situation.
Reverse Mortgage vs. HELOC: Which One Makes More Sense?
There is no universal answer.
A HELOC can be an excellent option for homeowners with reliable income who need short-term access to equity and can comfortably handle the monthly payments.
A reverse mortgage may be more appropriate for older homeowners who want to improve retirement cash flow, eliminate an existing mortgage payment, or establish a line of credit without required monthly principal and interest payments.
The key is to compare more than just the interest rate.
You should also consider your income, existing debt, how long you plan to remain in the home, the total loan costs, and how important preserving home equity is to you.
I’ve spent more than 25 years in financing, and one thing I’ve learned is that the right financing solution depends on the individual situation.
A program that works extremely well for one homeowner might be a poor fit for another.
If you are considering a reverse mortgage, the first step is understanding what you might qualify for, how much equity would be available, and whether the loan actually helps accomplish your goals.
Have Questions About Your Reverse Mortgage Options?
If you’re considering a reverse mortgage or comparing it with a HELOC, feel free to reach out.
I can help you understand how the different options work and what factors may affect your situation.
There is no reason to make a major financial decision until you understand the numbers and the tradeoffs.
Learn More About Reverse Mortgages
All financing is subject to eligibility, lender approval, program guidelines, applicable licensing, and availability. HECM borrowers must complete required counseling with a HUD-approved counseling agency. This information is educational and is not a loan commitment or individualized financial, legal, or tax advice.