How a reverse mortgage and a home equity loan work differently
A reverse mortgage lets you borrow against your home's value without making monthly payments back. The lender pays you — either as a lump sum, monthly payments, or a line of credit you draw from as needed. You keep living in the home, and the loan is repaid only when you move, sell, or pass away. The most common type is a Home Equity Conversion Mortgage (HECM), which is federally insured.
A home equity loan works like a second mortgage. You borrow a fixed amount upfront, and you make monthly payments to repay it over a set term — usually 5 to 15 years. The lender has a claim on your home if you don't pay. You must may have access to based on income, credit score, and debt-to-income ratio, just as you would for a regular mortgage.
The core difference: with a reverse mortgage, you receive money and owe nothing monthly. With a home equity loan, you receive money and owe a fixed payment every month. That single fact shapes everything else — who can use each product, what it costs, and what happens to your home.
Key Takeaways
- A reverse mortgage requires no monthly payments and is available only to homeowners 62 and older; a home equity loan requires monthly payments and has no age limit.
- A reverse mortgage is repaid when you move, sell, or die; a home equity loan is repaid over a fixed schedule, usually 5 to 15 years.
- A reverse mortgage uses your home's equity but does not require you to prove income or creditworthiness; a home equity loan requires income verification and a credit check.
- Both put your home at risk if you cannot or do not pay; both carry upfront costs, though reverse mortgages typically cost more.
- A home equity loan makes sense if you have steady income and can handle a monthly payment; a reverse mortgage makes sense if you are retired, have limited income, and want to stay in your home.
Age and income requirements that rule out one option or the other
You must be at least 62 years old to take out a reverse mortgage. There is no upper age limit. A home equity loan has no age requirement — you can be 40 or 80 — but you must have income or assets to show you can repay it.
A reverse mortgage does not require you to prove income. The lender checks that you can pay property taxes, homeowners insurance, and maintenance costs, but they do not verify a salary or pension. This makes a reverse mortgage accessible to retirees living on Social Security alone, or those whose income is too low or irregular to may have access to for a home equity loan.
A home equity loan requires income verification. You will need recent pay stubs, tax returns, or bank statements showing you can afford the monthly payment. If you are retired and your only income is Social Security, most lenders will deny you. If you have a pension or investment income, you may may have access to, but the lender will scrutinize it.
Monthly payments and how long you owe the money
With a reverse mortgage, you make no monthly payments while you live in the home. Interest accrues and is added to the loan balance each month. When you move, sell the home, or pass away, the loan is repaid from the sale proceeds or your estate. If the home sells for less than you owe, the HECM insurance covers the difference — you or your heirs do not owe the shortfall.
With a home equity loan, you make a fixed monthly payment for the entire loan term. If you borrow $50,000 over 10 years, you might pay $500 to $600 per month, depending on interest rates. You must make this payment every month, or the lender can foreclose. When the term ends, the loan is paid off and you owe nothing more.
The payment difference matters most if you are on a fixed income. A reverse mortgage preserves your monthly cash flow. A home equity loan reduces it. If you cannot absorb a $400 or $500 monthly payment, a home equity loan will strain your budget.
Costs: upfront fees, interest rates, and insurance
A reverse mortgage carries higher upfront costs. You will pay an origination fee (typically 1 to 2 percent of the home's value), an appraisal fee, a title search, and mortgage insurance (usually 0.55 to 2.8 percent of the loan amount). Total upfront costs often run $4,000 to $10,000 or more, depending on your home's value. These fees are usually deducted from the money you receive or added to the loan balance.
A home equity loan has lower upfront costs — typically $500 to $2,000 for appraisal, title work, and processing. Interest rates on home equity loans are often lower than reverse mortgage rates because you are making monthly payments, which reduces the lender's risk.
Both products charge interest on the outstanding balance. With a reverse mortgage, interest compounds monthly and grows over time. With a home equity loan, you pay interest only on the amount you owe, which shrinks with each payment. If you plan to borrow for only a few years, a home equity loan's lower upfront cost may outweigh the reverse mortgage's no-payment benefit.
How each loan affects your home and your heirs
Both a reverse mortgage and a home equity loan put a lien on your home. If you do not pay property taxes or maintain homeowners insurance, the lender can foreclose. If you stop maintaining the home, the lender may also have grounds to call the loan due.
With a reverse mortgage, your heirs inherit the home only if they repay the loan balance. Most heirs sell the home to settle the debt. If the home is worth more than the loan balance, heirs keep the difference. If the home is worth less, the HECM insurance absorbs the loss and heirs owe nothing.
With a home equity loan, your heirs inherit the home subject to the loan. They must continue making monthly payments or refinance the loan in their own name. If they cannot or will not pay, the lender forecloses and sells the home.
If leaving the home to your children is a priority, a reverse mortgage may be safer because the insurance protects them from owing more than the home is worth. A home equity loan leaves them with a fixed debt that could exceed the home's value in a declining market.
When a reverse mortgage makes more sense
A reverse mortgage is the better choice if you are 62 or older, plan to stay in your home for at least five more years, have limited monthly income, and want to avoid a fixed payment. It works well if you are retired, living on Social Security, and need cash for medical bills, home repairs, or daily expenses. The no-payment structure preserves your monthly budget.
A reverse mortgage also makes sense if you have poor credit or irregular income. Because the lender does not verify income or check your credit score, you cannot be denied on those grounds. You may have access to based on age, home equity, and the ability to pay taxes and insurance.
When a home equity loan makes more sense
A home equity loan is the better choice if you are under 62, have steady income, and can afford a monthly payment. It is also better if you plan to borrow for only a few years, because the lower upfront costs mean you break even faster than with a reverse mortgage.
A home equity loan makes sense if you want to borrow a specific amount for a specific purpose — a kitchen remodel, a car, or debt consolidation — and repay it on a fixed schedule. You know exactly when the loan will be paid off and what your monthly obligation is.
A home equity loan is also preferable if you want to leave your home to heirs with minimal debt. Because you are paying down the balance each month, the loan shrinks over time. A reverse mortgage balance grows, which may leave less equity for your heirs.
Frequently Asked Questions
Can I get a reverse mortgage if I still owe money on my regular mortgage?
Yes. You can use reverse mortgage proceeds to pay off your existing mortgage. After that is paid, you owe nothing monthly on either loan. This is common for retirees who want to eliminate their mortgage payment.
What happens if I move or sell my home while I have a reverse mortgage?
The reverse mortgage becomes due and payable. You (or your heirs, if you have passed away) repay the loan from the sale proceeds. If the home sells for more than you owe, you keep the difference. If it sells for less, the HECM insurance covers the shortfall.
Can I pay off a reverse mortgage early without a penalty?
Yes. You can repay a reverse mortgage at any time without penalty. Some borrowers pay it off if they receive an inheritance or decide to move. There is no prepayment penalty.
Which option is better if I have bad credit?
A reverse mortgage. Lenders do not check your credit score for a reverse mortgage. A home equity loan requires a credit check and typically a score of 620 or higher, so bad credit will disqualify you or result in a higher interest rate.
Can I use a home equity loan if I am retired and have no income?
Unlikely. Most home equity lenders require proof of income — a pension, Social Security statement, or investment income. If your only income is Social Security and it is below the lender's threshold, you will be denied. A reverse mortgage does not have this requirement.