Because car insurance rates vary among companies, there’s no standardized rate across the board. Researching different car insurance providers in your area and requesting quotes can help you gauge how competitive your current rate is in the market. If you discover another company offering a lower premium for comparable coverage, it might be worthwhile to consider switching carriers.

If you’ve owned your home for a while, you may have built up significant home equity that you can access as cash. Three common methods for tapping into this equity are a reverse mortgage, a home equity loan, and a home equity line of credit (HELOC).

All three options allow homeowners to borrow against their home equity and use the funds for various purposes, such as paying off high-interest credit cards or remodeling a bathroom.

However, each option functions differently, making one more suitable than the others depending on your specific needs and financial situation. Before choosing between a HELOC, reverse mortgage, or home equity loan, it’s essential to understand how each works and the benefits they offer.

As the name implies, a reverse mortgage is the opposite of a traditional mortgage: instead of borrowing money from a lender and paying it back over time, the lender pays the borrower — either in a lump sum, line of credit, or monthly installments — in exchange for a stake in the home.

The borrower is not required to make any repayments on the loan while they occupy the home. The loan does accrue interest, which the borrower can choose to pay off monthly or have added to the loan balance. The mortgage becomes due when the borrower moves out, sells the home, or passes away. At that point, the lender is either repaid in cash or takes possession of the home. Exceptions exist for surviving spouses who were residing in the home when the reverse mortgage was taken out.

Homeowners generally must be 62 or older to qualify for a reverse mortgage. They must also continue to maintain the home and pay property taxes.

Reverse mortgage pros:

  • Provides tax-free income to be used for any purpose
  • Allows you to stay in your home and “age in place”
  • No monthly repayments required

Reverse mortgage cons:

  • Requires a substantial amount of home equity or a paid-off mortgage
  • Outstanding loan amount can snowball if you don’t repay interest
  • Loan interest is usually not tax-deductible
  • Upon the borrower’s death, the loan usually has to be repaid in a large lump sum, or else the home goes to the lender

A home equity loan, often referred to as a “second mortgage,” allows homeowners to borrow against their home’s equity. This type of loan uses your home as collateral, with terms typically ranging from five to 20 years. The loan amount is generally limited to up to 85 percent of the home’s combined loan-to-value ratio.

Homeowners receive a lump sum and repay it in equal monthly payments at a fixed interest rate. This stability means there’s no need to worry about fluctuating interest rates, making it easier to budget for consistent monthly payments. Additionally, home equity loan rates are often lower than those for unsecured personal loans because the home serves as collateral, reducing the lender’s risk.

Home equity loan pros:

  • Fixed interest rates, often lower than personal loans
  • Consistent monthly repayments
  • Long repayment timeline
  • Interest is tax-deductible if the loan is used for home improvement

Home equity loan cons:

  • Risk of losing your home if you default
  • Imposes strict lending criteria
  • Includes closing costs and fees
  • May take a while to obtain, similar to a mortgage

A home equity line of credit (HELOC) allows homeowners to borrow against their home’s equity and functions much like a credit card. You can draw from the credit line up to a specified amount as needed. During the initial draw period, typically five to 10 years, you can withdraw funds and make interest-only payments, which is beneficial if you have a tight budget.

After the draw period, you enter the repayment phase, usually lasting 10 to 20 years, where your payments will include both interest and principal. These payments may be significantly higher than during the draw period. The interest rate on a HELOC is generally variable, meaning monthly payments can fluctuate based on market interest rates.

HELOC pros:

  • Interest may be tax-deductible
  • Borrow money as needed, paying interest only on actual withdrawals
  • Interest-only payments possible during the initial draw period
  • Competitive interest rates compared to personal loans and credit cards

HELOC cons:

  • Payments may increase significantly during the repayment phase
  • Variable interest rates can lead to fluctuating payments and vulnerability to rising interest rates
  • Risk of losing your home, as it serves as collateral for the loan

As with most financial instruments, each of these options has its pros and cons.

If you’re looking for tax savings with your financing, home equity loans and HELOCs offer a distinct advantage.

“HELOCs and home equity loans can be tax-deductible for homeowners, but the rules around their tax deductibility have changed in recent years,” says Irvine, Calif.-based CPA Emily Egkan, a senior manager with the accounting firm Withum.

Previously, homeowners could deduct interest on loans used for any purpose without much limitation. However, as of Dec. 15, 2017, the rules changed. Single and joint filers can now deduct interest on up to $750,000 of qualified loans, while those married filing separately can deduct interest on up to $375,000 of loans.

Additionally, the loan must be used for specific purposes. The borrowed equity must be used to “construct or substantially improve an existing house” that secures the loan. Substantial improvements are defined as those that add value to the home, extend its useful life, or adapt it to new uses. To qualify for the deduction, you also need to itemize your deductions when filing your taxes.

Reverse mortgage interest may also be deductible, similar to traditional mortgage interest. However, Egkan notes that the deductible amount of interest on a reverse mortgage can be limited. Reverse mortgage borrowers can choose not to pay interest during the loan term, adding it to the loan balance instead. If they do, the accrued interest (including the original issuance discount) is not tax-deductible until the loan is fully paid off. You cannot deduct interest that you haven’t paid.

Like other loans and credit lines, reverse mortgages are subject to the same debt limits and home-use rules. Therefore, an elderly couple who takes out a reverse mortgage to cover daily expenses or help a grandchild with college tuition will not receive a tax break.

You’ll likely need a credit score of 680 or higher to qualify for a home equity loan or HELOC. However, a credit score between 620 and 679 may also be sufficient, depending on the lender.

“The credit score and income requirements will vary for reverse mortgages,” says Brad Baker, vice president of Underwriting and Capital Markets for Equity Now, a mortgage lending and servicing company in Mamaroneck, New York. “In general, HELOCs and home equity loans have more stringent credit and income requirements compared to reverse mortgages.”

To use any of these financing options, you’ll need to meet certain criteria.

For a reverse mortgage, either a federally-backed Home Equity Conversion Mortgage (HECM) or a private reverse mortgage, you typically must be a homeowner aged 62 or older. (Some lenders offer private reverse mortgage options to those as young as 55.) The home must be your primary residence, and you need to own it outright or have a very low balance. Generally, a minimum of 50 percent equity is required.

If you still have a mortgage balance, be prepared to pay it off when closing on the reverse mortgage. Additionally, you can’t be delinquent on any federal debt or use reverse mortgage funds to pay off federal debt. Your home must be in good condition, and you must agree to counseling from a HUD-approved reverse mortgage counseling agency.

To qualify for a home equity loan or HELOC, you’ll usually need a debt-to-income (DTI) ratio of no more than 43 percent, a credit score of 680 or higher (although some lenders accept as low as 620), a history of punctual debt repayments, a minimum of 15 to 20 percent equity in your home, and a reliable and sufficient income source. Your home will generally be appraised by the lender, and the appraised value will determine how much of your equity you can access.

Wondering when you’ll receive your money? The timing depends on which of the three financing options you choose.

“Home equity loans disburse the full loan amount in a lump sum at closing. HELOCs allow the borrower to draw the funds as needed over time, similar to a credit card. Reverse mortgages typically disburse a fixed amount to the borrower every month, creating an income stream,” says Baker.

However, Christina McCollum, producing market leader for Churchill Mortgage, notes that your reverse mortgage lender may offer several disbursement options. “You can opt for a one-time lump sum, a combination of a lump sum and deferred payments, or just deferred payments,” she explains.

The terms and timeline for repaying what you borrow vary based on the type of loan or line of credit.

“Home equity loans start collecting payments immediately, similar to a regular first mortgage, with a fixed monthly amount,” Baker explains, noting that these repayments cover both principal and interest. “For HELOCs, payments begin once funds are drawn from the line, and the amount due will depend on the total amount borrowed. During the HELOC repayment period, you can no longer access funds, and you must repay both interest and principal over a 10- to 20-year period.”

Baker also points out that a reverse mortgage does not require monthly payments. “Instead, the debt becomes due at the end of the loan term, typically repaid using proceeds from selling the home.”

Regardless of which financing option you choose, you must go through the closing process (similar to taking out a mortgage), and there are closing fees to be paid. For home equity loans or HELOCs, closing costs typically range between 2–5 percent of the total loan amount, although they can sometimes be as low as 1 percent. These costs usually cover expenses such as origination fees, appraisal fees, credit report fees, title search fees, and legal fees.

Reverse mortgage closing costs tend to be higher than those for other financing options, but the exact costs can vary depending on the lender and the specific loan program you select.

When deciding between a HELOC, reverse mortgage, or home equity loan, the best choice depends on several factors.

“If you’re a senior needing extra income to live comfortably without plans to move and without heirs expecting the property, a reverse mortgage might be ideal,” says Lyle Solomon, a personal finance expert and attorney at Oak View Law Group in Rocklin, Calif. “It can ease financial burdens and provide funds for living expenses, healthcare, and other bills.”

Alternatively, if you need funds for a costly home improvement project or to consolidate high-interest debt, a home equity loan could be more suitable.

“A home equity loan offers an affordable option for renovations or debt consolidation,” Solomon explains. “The lump sum from a home equity loan can also be used for large expenses, with lower interest rates compared to credit cards and personal loans.”

Moreover, expenses related to home upgrades or renovations financed through a home equity loan or line of credit may qualify for tax deductions, making these options even more advantageous.

A reverse mortgage can be a prudent choice for homeowners planning to remain in their residence long-term, justifying the upfront closing costs. For example, if you’re 65 and intend to age in place indefinitely, a reverse mortgage may be a viable option.

Another scenario where a reverse mortgage could be beneficial is if you need additional funds to cover daily living expenses in retirement. If your retirement savings are insufficient, a reverse mortgage can provide cash flow to help meet your needs. However, it’s crucial to note that the funds received, along with accruing interest, will eventually need to be repaid when the borrower permanently leaves the home, sells it, or passes away.

If you have a specific financial need, like funding a major expense such as renovations, a large purchase, or consolidating high-interest debt, a home equity loan can be an excellent solution. It provides a lump sum of money at a fixed interest rate, making it ideal for planned expenses or paying off high-interest credit card debt and personal loans.

If you have ongoing renovation expenses or anticipate multiple large bills over time, a HELOC might be a suitable option. “For example, a HELOC allows you to tap into your home equity for each project individually, such as completing three separate home improvement projects over a span of five years,” explains Solomon. HELOCs can also be useful for covering extended expenses like college tuition. While HELOC interest rates tend to be slightly higher than those of home equity loans as of July 2024 (and subject to fluctuations), the flexibility of borrowing as needed and paying interest only on what you use can make a HELOC an attractive choice.