If you’ve owned your residence for a while, you’ve probably built up a valuable amount of home equity you can tap into and use as cash. Three popular ways to draw equity from your home include a reverse mortgage, a home equity loan or a home equity line of credit (HELOC).
All three of these financial instruments help homeowners access the equity in their homes, but they do so in different ways. Each allows homeowners to use the funds for any purpose, ranging from paying off their high-interest credit cards to remodeling a bathroom.
However, each financing option works differently and one of these options may be more suitable than the others. Before deciding between a HELOC vs reverse mortgage vs home equity loan, it’s worth comparing how each works and the advantages each one has.
Reverse mortgage
As the name implies, a reverse mortgage is the opposite of a regular mortgage: Instead of the individual borrowing money from a lender, then paying it back until they own the home, the lender pays the borrower — either in a lump sum, or monthly installments — in return for a stake in it.
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 or have added to the loan balance. The loan comes due when the borrower chooses to move out, sells the home or dies (in which case the lender either is paid back in cash or takes possession of the home).
Homeowners have to be 62 or older to qualify for a reverse mortgage.
Takeaway: Reverse mortgages can work well if the homeowner needs to supplement their Social Security benefits, retirement account distributions or other fixed income for daily needs, emergency expenses or a single large expenditure.
For more information on the Home Equity Loan or HELOC vs Reverse Mortgage visit the Scoop Blog
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