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HELOC vs. HE-Loan vs. Reverse Mortgage: What's The Difference?


Jan 4, 2023



Table of Contents

#1. What is a HE-Loan?
#2. What is a Reverse Mortgage?
#3. What is a HELOC?
#4. Which Option is Best For You? .

If you’re a homeowner looking into how you can tap into your home equity, there are a few different ways to achieve your goal. To find out the best strategy for your specific financial and personal situation, you may be wondering — what are the differences between a HELOC, a HE-loan, and a reverse mortgage? 

To help you understand how a HELOC, a HE-loan, and a reverse mortgage work, we’re defining these three secured financing options. We’ll also evaluate how each equity-tapping solution competes against the others, looking at any pros and cons. So you can make an informed and empowered decision surrounding your home equity, let’s dive into this overview of HELOCs, HE-loans, and reverse mortgages. 

#1.What is a HE-Loan?

A home equity loan, often referred to as a HE-loan, is a second mortgage that uses your accumulated equity as collateral for borrowing funds. 

As a type of secured borrowing, HE-loans are generally offered at lower interest because your home is backing the borrower’s position. As of October 2022, the average interest rate for a home equity loan was 7.29%. 

Being a loan and not a line of credit, the funds from a HE-loan are distributed by the lender in a lump sum transfer. You will be responsible for making monthly payments during the set repayment period, and interest is usually charged at a fixed rate — meaning it does not adjust due to market variation throughout the loan's lifetime. 

In most cases, a home equity loan allows homeowners to borrow up to 85% of the property’s fair market value minus the amount owed on the initial mortgage used to purchase the home. 

Unlike HELOCs, the repayment period for a HE-loan begins immediately after the funds have been distributed. A HE-loan also generally invites higher closing costs than a HELOC, but lower closing costs than refinancing. 

#2. What is a Reverse Mortgage? 


A reverse mortgage is another type of loan that allows homeowners to borrow funds using their accumulated home equity as collateral. 

Unlike HE-loans and HELOCs, reverse mortgages are exclusively for older homeowners. Most reverse mortgages maintain an eligibility requirement of 62 years or older. 

The main appeal of reverse mortgages is that there are no monthly repayment responsibilities. Because of this flexible borrowing system, reverse mortgages are usually recommended to senior citizens who need help with their living expenses. Reverse mortgages can also be leveraged by eligible homeowners to bolster their retirement funds or create an emergency savings account for unexpected expenses. 

While a reverse mortgage can be incredibly helpful, this type of secured borrowing does come with a downside. The loan underwriting fees, closing costs, and interest payments associated with taking out a reverse mortgage make it a particularly expensive borrowing strategy compared to your other options. 

The average interest rate on a reverse mortgage is 7.56% APR. You may end up spending a substantial amount of your accumulated home equity on the process itself, reducing the amount you have available once you receive your reverse mortgage. 

However, the ability to skip out on monthly payments may make the downside of high underwriting costs worth it for you. These are important points to consider if you are thinking about whether a reverse mortgage is the best choice for you. 

#3.What is a HELOC? 

A HELOC, called a home equity line of credit, is a second mortgage that uses your accumulated home equity as collateral for borrowing money. Rather than a lump sum loan, a home equity line of credit is a type of credit line — similar to, but far more secure and affordable than a credit card. 

Being backed by your home equity, HELOCs offer competitively low interest rates compared to other consumer borrowing solutions. The average market interest rate for a HELOC is in the 7% range, but if you have a strong credit history, you may be able to qualify for lower interest. 

Being a line of credit, HELOCs have a defined period where you can take out funds — called the draw period, and a set repayment period. HELOCs are most commonly charged a variable rate mortgage, meaning that the amount you pay each month during the repayment period is subject to change based on market activity. 

Most homeowners use their HELOCs to fund large upfront expenses, such as unexpected medical bills, a wedding, or tuition. Another common use case for HELOCs is to establish cash savings for emergencies. 

#4.Which Option is Best For You? 

It’s important to remember that all three of these secured consumer financing options are technically forms of debt, meaning that a wise decision-making process is essential when taking steps toward a HE-loan, HELOC, or reverse mortgage. 

The best decision always depends on your personal circumstances. We recommend speaking with a professional to help you determine which solution you should leverage to tap your equity. 

However, a HELOC’s competitively low interest and flexible repayment plan options make it a particularly attractive option. HELOCs offered by Hitch introduce the added advantage of an innovative fully-digital process, creating a fast, frictionless, and streamlined HELOC experience. To learn more about Hitch, visit our website. Or, click here to check your offer!

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1. Qualified applicants may borrow up to 95% of their home’s value. This does not apply to investment properties.2. HELOCs have a 10-year draw period. During the draw period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) the total of all accrued finance charges and other charges for the monthly billing cycle. During the draw period, the monthly minimum payments may not reduce the outstanding principal balance. During the repayment period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) 1/240th of the outstanding balance at the end of the draw period, plus all accrued finance charges and other fees, charges, and costs.The lender will calculate this amount by taking the outstanding Account Balance on the last day of the draw period and dividing it by 240 months and then adding any finance charge that accrues but remains unpaid during the monthly billing cycle plus any other fees, charges and costs to the fixed principal payment that is due. During the repayment period, the monthly minimum payments may not, to the extent permitted by law, fully repay the principal balance outstanding on the HELOC. At the end of the repayment period, the borrower must pay any remaining outstanding balance in one full payment.3. The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Most borrowers get their cash on average in 21 days. The time period calculation to get cash is based on the first 4 months of 2024 loan funding's, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications. Closing costs can vary from 3.0 - 5.0%. An appraisal may be required to be completed on the property in some instances.4. Not all borrowers will meet the requirements necessary to qualify. Rates and terms are subject to change based on market conditions and borrower eligibility. This offer is subject to verification of borrower qualifications, property evaluations, income verification and credit approval. This is not a commitment to lend.5. The content provided is presented for information purposes only. This is not a The content provided is presented for information purposes only. This is not a commitment to lend or extend credit. Information and/or dates are subject to change without notice. All loans are subject to credit approval. Other restrictions may apply.