By Tim MaxwellHome Equity Loan vs. HELOC vs. Reverse Mortgage: What’s the Difference?
If you've lived in your home for a few years, chances are you're sitting on significant—and growing—equity. The average homeowner now holds about $313,000 in home equity, according to a March 2025 ICE Mortgage Monitor report, a 6% increase over last year. You may want to leverage some of this equity to renovate your home, consolidate debt or even create extra income in retirement.
Depending on your goal, a home equity loan, home equity line of credit (HELOC) or reverse mortgage could help. While these options allow you to access your equity, they're distinctly different in many ways. Ultimately, the decision of how best to tap your home equity will come down to which method aligns with your goals and needs the best. Here's how they compare:
| Home Equity Loan | HELOC | Reverse Mortgage | |
|---|---|---|---|
| Payout | Lump sum at closing | Draw funds as often as needed up to the credit limit during the draw period | Lump sum, monthly payments or line of credit |
| Interest rate | Fixed | Variable (though some lenders offer fixed-rate options) | Variable rates are typical |
| Repayment | Monthly payments of principal and interest | Interest-only payments during draw period, then principal plus interest payments during repayment period | No payments due until the owner dies or moves out; usually repayment is achieved by selling the home |
| Use of funds | Can be used for nearly any purpose | Can be used for nearly any purpose | Can be used for nearly any purpose |
| Eligibility |
Credit score of at least 660, though some lenders may require a higher score Debt-to-income ratio (DTI) of 43% or lower and at least 15% to 20% home equity |
Credit score of at least 620, though some lenders may require a higher score DTI of 43% or lower and at least 15% to 20% home equity | Must be 62 or older, have significant home equity and live in the home as your primary residence |
| Risks | Reduces home equity and puts home at risk of foreclosure | Reduces home equity and puts home at risk of foreclosure | Reduces home equity, puts home at risk of foreclosure and may limit inheritance for heirs |
What Is a Home Equity Loan?
A home equity loan is a type of second mortgage that typically allows you to access up to 85% of your home's value, minus what you owe on your mortgage. You can use the funds for home improvements, college tuition or virtually any reason. Like your primary mortgage, this second mortgage is secured by your home.
Example: Let's say you bought a home worth $400,000 and have since paid the balance down to $300,000. In the meantime, your home's value has risen to $500,000, which means you now have $200,000 in equity. Since most lenders allow you to borrow up to 85% of your home's value ($500,000 x 0.85 = $425,000), minus your current mortgage balance, you could be eligible to borrow up to $125,000 ($425,000 - $300,000) through a home equity loan.
You'll generally repay a home equity loan with a fixed interest rate and fixed payments over a term ranging from five to 30 years.
Tip: You may qualify for a lower interest rate if you have a higher credit score (the higher the better), reliable income and a lower debt-to-income ratio.
Pros and Cons of a Home Equity Loan
A home equity loan may make sense if you know exactly how much money you need and prefer consistent monthly payments that won't change over time. But like any financing option, it comes with both benefits and downsides you must consider.
Pros
-
Lower interest rates: Because home equity products are secured by your home, they tend to offer lower interest rates than unsecured options like credit cards and personal loans.
-
Lump-sum payout: Funds are distributed upfront, which can be ideal if you want to pay a large one-time expense.
-
Fixed payments: Home equity loans have fixed rates, so your monthly payment stays the same over the life of the loan.
-
Longer repayment period: Your payment term can last as long as 30 years. A longer repayment term can lower your monthly payment, though you'll likely pay more in interest over time.
Cons
-
Risk of losing your home: Because your home serves as collateral on the loan, your lender could initiate a foreclosure if you fail to make your payments.
-
Fees and closing costs: Closing costs usually run from 2% to 5% of the loan amount. These costs are often taken out of your loan upfront, so you'll have less cash available than what you were approved to borrow.
-
Potential to overborrow: You might qualify for more money than you actually need, and it can be tempting to take the full amount. But that bigger loan comes with bigger payments, including more interest.
Learn more: Pros and Cons of Home Equity Loans
What Is a HELOC?
A HELOC is a type of revolving credit that works like a credit card. Using your home's equity, you can borrow as needed, and only pay interest on the amount you borrow. Most lenders will let you borrow up to 60% to 85% of your home's value, minus your mortgage balance.
You could qualify for the same amount as in the previous example—up to $125,000, based on 85% of your home's value (minus the mortgage balance). But maybe you don't need to borrow that much. Let's say you're starting a home renovation and only need $25,000 for the first phase. That's the beauty of a HELOC. You borrow a smaller amount now and keep the rest available for later if needed.
HELOCs are repaid in two stages. You'll start with a draw period, usually five to 10 years, where you can make withdrawals and make interest-only payments. After that, you'll enter the repayment period, which can last 10 to 20 years. During this phase, you won't be able to borrow funds, and you'll pay back both the principal and the interest on the balance. Most HELOCs come with variable interest rates, so your payment can go up or down over time.
Pros and Cons of a HELOC
HELOCs are a convenient borrowing option that lets you make as many withdrawals as you want up to your borrowing limit. Still, they should be used with caution, and you must weigh the pros and cons before proceeding.
Pros
-
Lower interest rates: HELOCs usually have lower interest rates than personal loans and credit cards, and their variable rate often starts lower than the fixed rate you get with a home equity loan.
-
Flexible access to funds: Like a credit card, you can borrow what you need, when you need it, up to your credit limit. In this way, a HELOC can help you fund ongoing projects or cover unexpected expenses over time.
-
Interest-only payments at first: During a HELOC's initial draw period, you're usually only required to pay the interest, not the principal. That keeps monthly payments lower at first, but your principal balance won't start going down until later.
Cons
-
Variable interest rates: Unlike a home equity loan, which locks your rate for the duration of your term, a HELOC has variable rates that fluctuate up or down. That means your monthly payment could go up at any time if interest rates rise, though most lenders set limits on how high your rate can go.
-
Risk of losing your home: Like all of the loan types discussed here, HELOCs use your home as collateral, so your home could be at risk of foreclosure if you fall behind on your payments.
-
Easy to overspend: Just as it's easy to max out your credit card limit, it can be tempting to pull from your HELOC too often and end up with more debt than you bargained for.
Learn more: Pros and Cons of a HELOC
What Is a Reverse Mortgage?
A reverse mortgage is a loan option for homeowners age 62 or older that lets you turn a portion of your home equity into cash. These mortgages can help seniors whose fixed income may not be enough to cover their needs.
To qualify, you'll need to either own your home outright or have substantial equity. One of the most unique aspects of reverse mortgages is that you don't make monthly payments. Instead, the loan must be repaid if you:
- Move out permanently
- Pass away
- Stop paying property taxes, homeowners insurance or HOA fees
- Don't keep up with basic home maintenance
With a reverse mortgage, there are several ways you can receive funds from your equity, depending on your needs. You can take a lump sum, set up a line of credit to use when needed or receive monthly payments for a limited time or as long as you stay in the home.
Pros and Cons of a Reverse Mortgage
A reverse mortgage can free up cash and ease your monthly budget, especially if you're living on a fixed income. But there's a lot to consider, including how it might affect your heirs.
Pros
-
Financial breathing room: If your budget is tight with barely enough to cover your needs, a reverse mortgage can give you a little cushion. Whether you take a lump sum, draw from a line of credit or receive monthly payments, the extra funds can give your budget a shot in the arm.
-
No monthly mortgage payments: You don't have to make monthly payments toward the loan as long as you're living in the home and meeting the loan requirements.
-
Access to tax-free cash: The IRS doesn't consider reverse mortgage payments income, but instead a loan advance. That means the income you draw is usually tax-free. Of course, you should always consult a tax professional to see how the rules apply to you.
-
You don't have to move: Selling your home is probably the most direct way to access your home's equity, but a reverse mortgage gives you another option in case you want to keep living in your home.
Cons
-
Potentially high fees: Reverse mortgages have closing costs such as origination fees. Additionally, ongoing costs including property taxes and interest are continually added to the amount that will eventually have to be repaid.
-
Reduces your home equity: Since you're borrowing against your home, you're lowering the amount of your home's available equity. This could limit what your heirs receive.
-
Loan balance increases: If you're not making monthly payments, the interest on your reverse mortgage will continue to grow and add up over time.
Learn more: Pros and Cons of a Reverse Mortgage
Home Equity Loan vs. HELOC vs. Reverse Mortgage
Let's briefly break down the differences between home equity loans, HELOCs and reverse mortgages to help you determine if one of these home equity options can benefit you.
Payout
- Home equity loan: You receive the full loan amount as a lump sum when the loan closes. This works well if you need a large amount all at once, such as for major home repairs or paying off high-interest debt.
- HELOC: In this case, you'll get a credit limit and can take out money as you need it during the initial draw period. A credit line may work out well if you have expenses that come up over time or when you're not sure exactly how much you'll need.
- Reverse mortgage: If you're 62 or older, you can get money from your home's equity in several different ways depending on your needs: a lump sum, monthly payments or a line of credit.
Interest Rate
- Home equity loan: The interest rate is usually fixed, so your monthly payment stays the same for the whole loan. This makes it easier to factor your payments into your budget each month.
- HELOC: HELOCs usually have a variable APR, so your payments can fluctuate up or down.
- Reverse mortgage: These usually have variable interest rates. Since you're not making monthly payments, the interest mounts over time, and your loan balance keeps growing.
Repayment
- Home equity loan: Home equity loans have fixed rates, which means your payment will remain the same for the duration of your loan term, typically five to 30 years. These payments cover both the loan principal and interest.
- HELOC: During the initial five to 10 year draw period, you'll make interest-only payments on the amount you borrow. Then you'll enter the repayment period, which ranges from 10 to 20 years, and you'll start paying back both the principal and interest.
- Reverse mortgage: You don't have to make monthly payments. The loan is paid back when you move out, sell the home or pass away.
Use of Funds
- Home equity loan: While you can use the money for just about anything, they're best suited for big-ticket expenses like an addition to your home.
- HELOC: These are similar to a home equity loan in that you can use funds for any purpose you like. As with home equity loans, it's wise to use funds on expenses that improve your financial position, whether it's adding value to your home through improvements or paying off high-interest debt to lower your monthly bills (although this use has risks of its own).
- Reverse mortgage: Reverse mortgages don't impose restrictions on what you can spend your money on after closing, but older borrowers often use reverse mortgage funds to cover everyday costs, home improvements, emergencies or to pay down debt.
Eligibility
- Home equity loan: To qualify, you usually need at least 15% to 20% equity in your home, a credit score of 660 or higher and a debt-to-income ratio below 43%. Lenders generally want to see that you have reliable income and that you have enough after paying your bills to make a new loan payment.
- HELOC: The requirements for a HELOC are very similar: You must have home equity of at least 15% to 20% and a credit score above 620—but the higher the better. Your total monthly debts should be no more than 43% of your gross monthly income. Be prepared to submit proof of income, including pay stubs, W-2s or tax returns to support the income stated on your application.
- Reverse mortgage: To get a reverse mortgage, you must be at least 62 years old, own your home outright or have substantial home equity and live in the home as your primary residence. There's no minimum credit score, but lenders may review your credit to look at your payment history and any charge-offs.
Risk
- Home equity loan: The primary risk of a home equity loan is your house, since it's used as collateral to secure the loan. If you're unable to make the payments, the lender could take your house in a foreclosure. You'll also have less equity in your home if you want to sell it or borrow again later.
- HELOC: Again, your home is on the line and you could lose it if you miss payments. Also, you'll have less equity available to leverage in the future.
- Reverse mortgage: The loan reduces your home equity, which means you'll have less to leave your heirs. You also must pay your property taxes, insurance or keep up the home. Otherwise, you could lose your home.
Should You Get a Home Equity Loan, HELOC or Reverse Mortgage?
Not sure which home equity lending option is best for your unique situation? Here's a breakdown of scenarios when each one might make the most sense.
A Home Equity Loan May Be a Good Option If:
- You're planning a major renovation. Having a large sum upfront could help you build an add-on, remodel a kitchen or bathroom or take on other large-scale home improvement projects.
- You're consolidating high-interest debt. Home equity loans typically have lower interest rates than credit cards and personal loans. You could also use the funds to combine high-interest debt into one lower-rate loan with one payment. This action could streamline your bills and potentially help you save interest over time.
- You're facing a big, one-time expense. A home equity loan can give you the funds to cover just about any large expense, from college tuition and medical bills to starting a business or something else. Its flexible loan terms (from five to 30 years) and fixed monthly payments can help you manage your payments over time.
A HELOC May Be a Good Option If:
- You need an emergency backup fund. If you don't have enough available funds in your emergency fund, a HELOC might give you the cash you need to get through a tough situation or pay an unexpected expense. You'll only have to borrow what you need, and only pay interest on that amount. Alternative options include a personal loan or a credit card, which have higher rates but don't require you to put up your home as collateral.
- You're tackling ongoing or unpredictable home projects. In this situation, being able to make multiple withdrawals as your project moves along can be very useful.
- You want business funding. You can generally use a HELOC to start a new business and pay for inventory, equipment and other costs. HELOCs tend to have lower interest rates than other types of credit. Still, starting a business is risky, and you might consider a small business loan if you don't want to use your home as collateral.
A Reverse Mortgage May Be a Good Option If:
- You're house-rich, but have limited cash flow. A reverse mortgage can help you if you're over age 62 and are sitting on substantial equity. You can turn some of that equity into cash, without having to sell your home or make monthly payments. You can use the money to cover everyday expenses and make ends meet during retirement.
- You want to age in place. You can use HELOC funds to cover living expenses, in-home care or home improvements. That can make it easier to stay in your home and live more comfortably.
- You don't have heirs. A reverse mortgage can be a smart option if you don't have heirs, since it lets you turn your home equity into cash to support your lifestyle. With no one to leave the home to, you can make the most of it while you're living rather than letting that equity go unused.
Frequently Asked Questions
Boosting Your Credit Could Improve Your Terms
Home equity loans, HELOCs and reverse mortgages are equity lending options that can help you pull cash from the equity in your home. Choosing the best option may come down to which one best fits your needs and how you want to repay the money.
While credit isn't a primary concern for reverse mortgage lenders, having good credit may help you secure more favorable rates and terms on a home equity loan or HELOC. Before you apply, check your credit report and FICO® Score☉ for free with Experian and take steps to improve your credit.
Curious about your mortgage options?
Explore personalized solutions from multiple lenders and make informed decisions about your home financing. Leverage expert advice to see if you can save thousands of dollars.
Learn more
About the author
Tim Maxwell
Tim Maxwell is a former television news journalist turned personal finance writer and credit card expert with over two decades of media experience. His work has been published in Bankrate, Fox Business, Washington Post, USA Today, The Balance, MarketWatch and others. He is also the founder of the personal finance website Incomist.
Read more from Tim