Difference Between Reverse Mortgages vs. HELOCs

A reverse mortgage allows homeowners aged 55+ to borrow against home equity without monthly payments, while a HELOC provides a revolving credit line with interest-only payments on withdrawn amounts. Reverse mortgages are ideal for retirees needing income, while HELOCs suit those seeking flexibility to finance projects or expenses.

Compare Reverse Mortgages vs. HELOCs

Both reverse mortgages and HELOCs (Home Equity Lines of Credit) leverage your home’s equity, but they cater to different financial needs. Reverse mortgages offer income for retirees, whereas HELOCs provide flexible, on-demand borrowing. Understanding the mechanics, benefits, and drawbacks of each can help Canadian homeowners make informed decisions.

What is a Reverse Mortgage?

A reverse mortgage is a loan available to homeowners aged 55 or older that allows them to access a portion of their home’s equity without requiring monthly repayments. The loan balance, including interest, is repaid when the homeowner sells the home, moves out, or passes away.

What is a Home Equity Line of Credit (HELOC)?

A HELOC is a revolving line of credit secured against your home. It allows you to borrow up to 65%-80% of your home’s value, making interest-only payments on the amount drawn. Unlike a reverse mortgage, a HELOC requires regular payments to avoid accumulating debt.

Is a Reverse Mortgage the Same as a HELOC?

No, a reverse mortgage differs from a HELOC in purpose and payment structure. Reverse mortgages don’t require monthly payments, while HELOCs do. Reverse mortgages are designed for retirees seeking steady income, whereas HELOCs cater to homeowners needing flexible access to credit.

Is a Reverse Mortgage Better Than a HELOC?

It depends on your financial goals:

Reverse mortgages suit retirees needing cash flow without monthly payments.

HELOCs offer flexible borrowing for ongoing expenses or projects.

For retirees with fixed incomes, reverse mortgages reduce repayment stress. HELOCs, however, work best for those with stable income who can manage monthly payments.

What Are the Similarities Between a Reverse Mortgage and a HELOC?

Similarities between a reverse mortgage and a HELOC:

• Leverage home equity as collateral.

• Allow access to a portion of your home’s value.
• Sometimes have variable interest rates tied to market conditions.

The primary distinction is the repayment structure: reverse mortgages defer payments, while HELOCs require immediate servicing.

What are the Pros and Cons of Reverse Mortgages vs. HELOCs?

Pros of a Reverse Mortgage:

• No monthly payments.

• Income is tax-free.

• No risk of foreclosure if loan terms are met.

Cons of a Reverse Mortgage:

• Higher interest rates compared to traditional mortgages.

• Reduces home equity for heirs.

• Limited to 55+ homeowners.

Pros of a HELOC:

• Flexible borrowing.

• Interest-only payments.

• Can be reused as funds are repaid.

Cons of a HELOC:

• Requires regular payments.

• Risk of default for non-payment.

• Dependent on credit approval and income.

How Do Interest Rates Compare Between Reverse Mortgages vs. HELOCs?

The interest rate for a reverse mortgage in the first position compared with a HELOC's rate in the first position is usually slightly higher. For example:

HELOC rates: 5.95% (P+0.5% if Prime = 5.45%)

Reverse mortgage rates: 7%-8%.

The higher rate reflects the deferred repayment structure of reverse mortgages, which increases lender risk.

How Much Are Interest Payments for Reverse Mortgages vs. HELOCs?

HELOCs require servicing with monthly interest payments, while payments for reverse mortgages are deferred.

What Are the Requirements for Reverse Mortgages vs. HELOCs?

Requirements for Reverse Mortgages:

• Homeowners aged 55+.

• Sufficient home equity (up to 55%).

• No credit or income requirements.

Requirements for HELOCs:

• Sufficient income to service debt.

• Good credit score (typically 680+ for HELOC in 1st position and 550+ for HELOC in 2nd position).

• Maximum loan-to-value ratio (65%-80%).

How Do Reverse Mortgages Impact Estate Planning?

Reverse mortgages reduce home equity, which means the borrower will be leaving less inheritance for heirs.

How to Choose Between Reverse Mortgages vs. HELOCs

Choosing between a reverse mortgage and a HELOC depends on your financial situation and goals. Reverse mortgages provide stress-free income for retirees, while HELOCs offer flexible borrowing for homeowners with stable income. Evaluate your needs, repayment ability, and future plans to make the best choice. A mortgage professional can guide you through the options and ensure your decision aligns with your financial goals.