Home Equity Loans and Reverse Mortgage Loans: The Differences

Although both reverse mortgage loans and home equity loans allow you to use your home equity as a basis for a loan, this is where the only similarities are. It is important that you do not mistake one for the other when trying to take out a loan using your equity. There are several differences between the 2 loans.

Qualifications

One of the main differences between reverse mortgage loans and a traditional second mortgage or home equity loans is the requirements needed to be qualified for the loan. Although the amount for the loans are based on the appraised value of your property and the current interest rate, that is where the similarities between the two end. With a home equity loan, lenders often require a certain income level to be qualified for the loan. Your debt to income ratio is also considered. This simply means they compare how much your debt is and how much you earn. It makes no sense to give a loan to someone who cannot pay off their debts or is barely able to.

On the other hand, your income is not an important factor when taking out a reverse mortgage loan. You can find that you can get a reverse mortgage loan regardless of your income, making it a suitable option for those who have a low income. However, there are specific qualifications needed for reverse mortgage loans including your age when you apply. In a nutshell, the older you are, the greater possibility is that you can get a larger amount.

Distribution

The way you get the loan is also different between home equity loans and reverse mortgage loans. With a home equity loan, you get a check or a credit card. With reverse mortgage loans, you have the option to receive the money through monthly payments or the lump sum amount.

Payment Method

There is also a notable difference on how you can pay of your loan. Home equity loans require that you make payments every month based on what has been calculated and agreed on by you and your lender. You will make these monthly payments until the entire balance has been paid. Reverse mortgage loans do not require monthly payments. Instead, the balance should be paid in full at the end of the mortgage term. It is important to remember, though, that if you sell your home or plan to move, the balance becomes due.

Borrowed Amount

Since a reverse mortgage loan is tied closely to your equity, you can only get this type of loan if you already have a very low mortgage balance or the property has been totally paid off. This means that you can borrow a much higher amount compared to a home equity loan. Often times, you can even get the entire value of your home since, in essence, your equity is the amount or value of the property. With a home equity loan, you only get the difference between the value of your property and the amount you still owe which is much smaller than what you will get with a reverse mortgage loan.