Choosing Between HELOC and Reverse Mortgage: Your Home Equity Guide

Home equity represents the portion of your property value that you actually own outright—the difference between what your home is worth and what you still owe on your mortgage. If you have significant equity built up, there are several ways to access it. The three primary options—reverse mortgage, home equity loan, and HELOC—each serve different financial needs and life circumstances. Your choice depends entirely on your age, financial goals, liquidity needs, and long-term planning.

Understanding Reverse Mortgages: The Retirement Income Route

A reverse mortgage is specifically structured for homeowners aged 62 or older who want to convert their home’s equity into accessible cash without taking on new monthly payments. The most prevalent type is the Home Equity Conversion Mortgage (HECM), which is insured and regulated by HUD.

To qualify for a reverse mortgage, you must meet specific criteria: be at least 62 years old, own your home outright or have paid down at least 50% of your mortgage, live in an eligible property type (typically single-family homes), maintain adequate funds for taxes and insurance, and complete HUD-approved counseling. The lender then makes payments to you—either as monthly installments, a lump sum, or a revolving credit line—rather than requiring you to make payments back.

However, reverse mortgages aren’t “free money.” The debt eventually comes due, typically through home sale after you pass away, which means your heirs will need to arrange financing or sell the property to settle the balance. Additionally, most reverse mortgages require that you maintain the property as your primary residence; moving into a long-term care facility for extended periods could trigger repayment obligations.

Home Equity Loans: Predictable Borrowing with Fixed Terms

A home equity loan functions as a second mortgage, using your accumulated equity as collateral. Unlike a reverse mortgage, there’s no age requirement—qualification depends on how much equity you’ve built, your credit profile, and your ability to afford additional monthly payments.

These loans typically allow you to borrow up to 85% of your home’s loan-to-value (LTV) ratio in one lump sum. You’ll repay the entire amount over 5 to 20 years at a fixed interest rate, meaning your monthly payment stays constant and predictable. This stability makes budgeting easier, but it also means you’re obligated to make payments regardless of whether you immediately need the full amount.

Home equity loans work well for specific projects like home renovations, debt consolidation, medical bills, or education expenses. An important distinction: if you default on this loan during your lifetime, you risk foreclosure and loss of your home, but your heirs are not forced to sell the property after your death as long as you haven’t defaulted.

HELOC Flexibility: Only Pay for What You Use

A home equity line of credit (HELOC) operates more like a credit card than a traditional loan. It gives you a maximum borrowing limit but lets you withdraw only the funds you actually need, when you need them. During the “draw period” (typically 5-10 years), you can access funds repeatedly and may pay only interest on amounts withdrawn.

Once the draw period ends, the “repayment period” begins, and you must repay borrowed amounts plus interest over the remaining loan term. Because HELOCs typically carry variable interest rates, your payments can fluctuate as benchmark rates change—a feature that provides flexibility but introduces budgeting uncertainty.

Reverse Mortgage vs. HELOC: Picking the Right Strategy

The decision between a HELOC and reverse mortgage hinges on your life stage and financial priorities. If you’re retired and want supplemental income to cover living expenses, healthcare costs, or Social Security gaps, a reverse mortgage creates a steady income stream without monthly obligations. The trade-off is that your home’s equity gradually depletes, and your estate faces settlement obligations.

Conversely, a HELOC suits borrowers of any age who need flexible, on-demand access to funds but want to preserve their estate. You maintain full control over how much you borrow and can repay early without penalty. The downside is variable interest rates that could increase your payments over time, and you must manage repayment discipline yourself.

Home Equity Loan vs. HELOC: Certainty vs. Flexibility

Home equity loans appeal to those who value predictability: you get a set amount upfront, know your exact payment, and have a clear payoff date. HELOC borrowers prioritize flexibility: access funds as needed, pay interest only on used amounts, and adjust spending without being locked into a full advance.

If you need $50,000 for a specific project, a home equity loan delivers that instantly with fixed terms. If you might need anywhere from $20,000 to $100,000 over the next few years but aren’t sure of exact amounts or timing, a HELOC prevents you from borrowing unnecessarily.

Making Your Home Equity Work: A Decision Framework

The best option for you depends on three factors: the amount of cash you need to access, the repayment structure that fits your budget and life plan, and whether you qualify based on age, equity, and credit profile.

Choose a reverse mortgage if you’re 62+, retired, and seeking consistent supplemental income without new monthly obligations.

Choose a home equity loan if you need a specific amount upfront, value payment certainty, and can comfortably afford an additional monthly commitment.

Choose a HELOC if you’re flexible about timing, want to borrow incrementally, and prefer managing variable payments in exchange for borrowing only what you use.

Additional Home Equity Options Worth Exploring

Beyond these three primary strategies, a cash-out refinance is another avenue: you refinance your existing mortgage into a larger loan and receive the difference as cash. This option may offer competitive rates if the broader rate environment is favorable.

Ultimately, consulting with a mortgage professional or financial advisor helps you understand which option aligns with your long-term financial plan, tax situation, and estate goals. Each approach to accessing home equity carries distinct advantages and risks that deserve careful consideration before you commit.