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Using a reverse mortgage or a home equity loan are common ways to get funds out of your house. If you have been in your house for a number of years and paid down the principal faithfully, you could use one of these methods to obtain the equity in your house. While they both accomplish similar results, there are key differences. The most important difference is that a reverse mortgage is not available to borrowers under 62 years of age. A reverse mortgage is mainly used as a retirement tool for elderly borrowers. A home equity loan is available to all borrowers, regardless of age. Here are a few more key differences:
One of the big differences between an equity loan and a reverse mortgage is the way in which you are paid. When you take out a home equity loan, you receive a credit card or checks and can write borrower against the entire loan balance. The total amount of the loan is provided for you at closing. A reverse mortgage offers either monthly payments or a lump sum payment.
Forward Mortgage v. Reverse Mortgage
The method that you repay the loan is also drastically different. When you take out a home equity loan, you make regular monthly payments over the life of the loan until the balance is paid off. It works exactly like a primary mortgage. Standard mortgages are considered forward mortgages and require payments from the borrower. On the other hand, a reverse mortgage does not require monthly payments over the life of the loan. The balance of the loan is due in a balloon payment at the end of the mortgage. You just collect the money from the bank until the loan period is over. Then, the balance becomes due when you either sell the house or move out. A reverse mortgage pays money out to the borrower.
With a home equity loan, you have a tax advantage. Since you are paying off the interest as you go, it is tax deductible. Since the loan is over a long period of time, you can deduct some of the interest from your taxes over a number of years.
Typically a reverse mortgage is for a much bigger balance than a home equity loan. Borrowing against your home equity, you can only borrow the difference between the amount owed and the value of the home. Therefore this amount is typically much smaller than when you take out a reverse mortgage. A reverse mortgage can only be utilized if the house is paid off or has a very low mortgage balance. Therefore, you are borrowing the entire amount of the house value.
A reverse mortgage and home equity loan are often done for very different reasons. A reverse mortgage is only possible for seniors as there are age restrictions on this type of loan. Therefore, the reason behind a reverse mortgage is to generate some extra income in the retirement years. With a home equity loan, you can take one out at any time for almost any reason.
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