There are a couple of options when it comes to using your home equity as collateral in a line of credit or loan. Home equity credit can be used the same as any other line of credit, while a reverse mortgage allows homeowners to delay further mortgage payments and access their home equity. While both options allow homeowners to access their home equity, there are some notable differences. 

Home Equity Line of Credit A home equity line of credit is similar to any other loan, except that the borrower uses their home equity as collateral. This is similar to refinancing your home or taking out a second mortgage. There are many reasons homeowners take out home equity credit, such as:

  • To pay off existing debt.

  • To make large payments, such as for children’s education.

  • To renovate.

  • To purchase other investments, such as property.

Once you are approved for a home equity line of credit, there is a limit on how much of the equity the borrower can access, like a limit on a credit card. The interest on home equity credit is variable and subject to the market environment. There is risk involved in taking out a home equity line of credit, as your collateral is your home. Failure to repay the loan can result in foreclosure or transfer of ownership. Reverse Mortgage Reverse mortgages are specifically created for elderly homeowners over the age of 60 who own their whole property, or most of it, and could use extra funds for living expenses, health care costs, or whatever else they may need. A reverse mortgage uses the equity of your home to repay the loan, so you don’t need to make regular payments. Once approved for a reverse mortgage, you can decide whether you’d like to receive the payment in installments or a lump sum, and you also get to decide what you’ll do with it–there are no terms on the use of the payment. With a reverse mortgage, there is no danger of losing your home. If you acquire more interest than equity over time, you and your estate will not have to pay anything more than the fair market value of the home, so the amount you owe will never be greater than the value of the home. There are some costs associated with reverse mortgage, such as home appraisal and legal advice. Additionally, a reverse mortgage does increase interest as equity decreases, which will affect the amount left to your beneficiaries and could make the estate harder to settle. If you are under 60, then you won’t be able to get a reverse mortgage. However, if you have both options then it is best to contact a mortgage expert today to find out how we can make your home equity credit work for you!