Tapping Into Your Home's Value: Reverse Mortgage, Home Equity Loan, or HELOC—Which Fits Your Needs?

Your house isn’t just a place to live—it’s likely your biggest financial asset. For most U.S. homeowners, the equity locked in their property represents a substantial chunk of their net worth. If you’re sitting on significant home equity and need access to cash, you have three main pathways: a reverse mortgage, a home equity loan, or a HELOC. Each operates differently and serves different financial situations.

Understanding Your Home’s Equity

Let’s start with the basics. Home equity is straightforward: take your property’s current value and subtract what you still owe on your mortgage and any other liens. If your home is valued at $250,000 and you have a $100,000 mortgage balance, your equity stands at $150,000. Now, if you layer in a second mortgage—say, a $50,000 home equity loan or line of credit—that equity figure drops to $100,000.

The catch? You can’t simply withdraw this equity like cash from a savings account. Instead, you’re borrowing against your home as collateral, which means the lender can claim the property if you default. Understanding this risk is crucial before proceeding.

Home Equity Loans: The Predictable Option

A home equity loan works much like a traditional mortgage, except it’s secured by your existing equity rather than the full property purchase. You receive a lump sum upfront and repay it over time with fixed monthly payments.

When it makes sense: You need a specific amount for a known expense—kitchen renovations, medical bills, or debt consolidation. There’s no age restriction, and most lenders cap borrowing at 80% to 85% of your equity. Interest rates are typically fixed, giving you payment predictability, though some lenders offer variable APRs or include balloon payment terms. Fees generally range from $2,500 to $6,000, depending on the lender.

The downside: You’re locked into a repayment schedule regardless of whether you actually need the full amount. If your project costs less than expected, you’re still paying interest on unused funds.

HELOCs: Maximum Flexibility

Unlike a home equity loan’s lump sum, a HELOC functions like a credit card backed by your home’s value. You access money only when needed, up to a preapproved limit.

Most HELOCs operate in two phases: a draw period (often 10 years) where you can withdraw funds and pay interest only, followed by a repayment period (often 20 years) where you tackle principal and interest. During repayment, some lenders let you renew the line and restart the draw cycle.

When it works: You’re unsure about your total funding needs or expect expenses to unfold gradually. A home renovation with uncertain costs, ongoing home repairs, or education expenses over time—HELOCs offer the adaptability. Interest rates are usually variable, so payments can fluctuate.

The trade-off: You’re paying interest on a fluctuating balance, making long-term costs harder to predict.

Reverse Mortgages: The Retirement Income Option

Here’s where the rules shift. Reverse mortgages are exclusively for homeowners aged 62 and older. Unlike traditional mortgages, you don’t make monthly payments. Instead, the lender sends you money—as a lump sum, monthly installments, or a line of credit—while you live in the house.

The loan comes due only when you move, sell, or pass away. For FHA-insured reverse mortgages, the maximum loan amount is $417,000 in most areas, though high-cost regions like Alaska and Hawaii can reach $625,500. Origination fees typically run $2,500 to $6,000.

When it’s appropriate: You’re retired, need supplemental income, and plan to stay in your home long-term. There’s no monthly payment obligation, making it ideal if your income is limited. However, if you want to leave your home to heirs, reconsider—the property typically must be sold to repay the debt upon your death.

Credit Scores and Accessibility

If your credit isn’t stellar, reverse mortgages often prove most forgiving since no monthly payments are required while you occupy the home. Lenders still evaluate your financial situation to ensure you can cover property taxes and maintenance, but the approval bar tends to be lower.

Home equity loans and HELOCs generally demand good to excellent credit from traditional lenders. However, the competitive lending market means some institutions will work with lower credit scores—it just may cost you a higher interest rate.

Making Your Choice

Your situation determines the best fit. Need cash for a specific, large project with known costs? A home equity loan offers stability and predictability. Facing variable or phased expenses? A HELOC gives you spending control. Approaching retirement at 62+ and wanting no monthly obligations? A reverse mortgage could provide needed income relief—provided you’re comfortable with the home eventually being sold.

Each approach to accessing home equity carries trade-offs. Review the terms carefully, understand the fees, and consider how each option aligns with your long-term financial and personal goals.