Home Equity Loan vs. Reverse Mortgage

With a home equity loan you make monthly payments until the loan is repaid (in addition to your 1st mortgage payment, if your equity loan is a 2nd). You must also have a sufficient debt-to-income ratio to qualify and usually a good credit score.

A reverse mortgage pays off any mortgages and is not affected by income or credit score.

Let's look at an example. Betty and Bob, a senior couple, own a home valued at $200,000. They have a current mortgage of $50,000 with a monthly principal and interest payment of $600 per month (not including taxes and insurance).

Betty and Bob are having a tough time financially. They find out that they can qualify for an Equity Mortgage or a Reverse Mortgage for $150,000 of their homes equity. They will use $50,000 to pay off the current mortgage and the remaining $100,000 can be used to help cover expenses.

If they choose the equity loan, they plan to put the money in the bank and draw monthly amounts to help with the monthly bills. If they choose the reverse mortgage, they plan to draw from it monthly to hlep with the monthly bills. Which is the better loan program for Betty and Bob?

Equity Mortgage

After the loan is established, equity is low

Equity increases through principal payments and appreciation

Monthly cost of the new mortgage is $950 per month

Reverse Mortgage

After the loan is established equity is high

Equity decreases based on the amount of the monthly draws and interest rate (appreciation slows down the rate of equity loss)

Monthly cost of the new mortgage is $0 per month

Since the goal for Betty and Bob is to increase the monthly cash flow to pay bills, the Reverse Mortgage is the logical choice.