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Differences Between a Reverse Mortgage and Home Equity Loan

06/03/2015 03:04 pm ET | Updated Jun 03, 2016
Michael Lazar

Both a reverse mortgage and a home equity loan are commonly used options by older Americans to tap into the equity in their home. If you have owned your home for a long enough time to be able to pay down the balance and free up some equity, both loan options can be viable ones to consider, should you find yourself short on funds. But there are differences between a reverse mortgage and a home equity loan.

Distribution Method

A big difference between a home equity loan and a reverse mortgage, according to SF Gate, is found in the way that you are paid. With a home equity loan, you'll get either an account (line of credit) with a debit card or checks (written off the line of credit) that you can write against the balance of your approved loan amount. But with a reverse mortgage, you will either get a lump sum payout or monthly payments.

Forward Mortgage v. Reverse Mortgage

In a typical home loan situation, you make monthly payments to reduce the balance of the account until it has been paid off. This a common term used in the industry because the mortgage is always moving forward until it's paid off. But with a reverse mortgage, you are taking out a loan that does not require payment until after you have passed away, when it's paid from the funds that the sale of your home derive, or if you have moved out of the home and the loan has become due. Whereas a home equity loan would be a forward mortgage, and would differ in how it's paid back.

Tax Advantages

There may be some tax advantages with a home equity loan. According to Bankrate, there are several instances where you can deduct interest paid over long term loans. To know for sure, check with your accountant for professional tax advice.

Pros and Cons

When considering which loan option makes the most sense for you, it's important that you weigh the pros and cons and gain advice from a professional financial advisor. Reverse mortgages don't have to be repaid and are not income or credit based, with lump sum payout options. Home equity loans are income and credit based with monthly repayment. Knowing which one is best for you is only a decision that you can make.

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