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