Reverse mortgage vs. home equity loan vs. HELOC: How to choose

Your house is more than a place to live. It’s one of your most important financial assets. If you’ve built equity in your home, you may be able to access that value to fund a major expense, pursue goals like retirement, make home improvements, consolidate debt, or fund education.

In this article we’ll break down three options that make it possible for you to utilize your home’s equity: a reverse mortgage, a home equity loan, or a home equity line of credit (HELOC). Each option works differently and comes with both advantages and limitations based on your unique financial situation. Keep in mind Rocket Mortgage® doesn’t offer reverse mortgages or HELOCs, but we’re here help you consider your options.

What is home equity?

Simply put, your equity is the difference between your home’s market value, which is what you could sell your house for, and the amount you owe on your outstanding mortgage balance. Here’s a simplified example of how to calculate your home equity¹:

Let’s say your home is worth $400,000 and you owe $300,000 on your mortgage. You have $100,000 of home equity.

A reverse mortgage, HELOC, or home equity loan allows you to tap into that equity by borrowing against it. Each one does this in different ways, so which is best for you depends on various factors, including your eligibility.

How do home equity loans, HELOCs, and reverse mortgages work?

Let’s take a closer look at the mechanics of each of these products.

How reverse mortgages work

A reverse mortgage is designed for older homeowners, typically 62 or older, who want to access their equity without selling their home. With a reverse mortgage, instead of you paying the bank for a mortgage, the bank pays you money each month. The bank gets paid back, with interest, when you sell your home, refinance, move out, or pass away.

There are three main types of reverse mortgages:

• Home equity conversion mortgage (HECM): This is the most common type of reverse mortgage and is federally insured by the FHA. HECMs are offered through certain, approved lenders.
• Single-purpose reverse mortgage: These are used for specific essential expenses, such as paying property taxes or making home repairs.
• Proprietary reverse mortgage: These are offered for high-value homes and not insured by the federal government.

How home equity loans work

A home equity loan, sometimes called a second mortgage, is exactly what it sounds like. It’s a loan that uses your home’s equity as collateral. It allows you to borrow a lump sum based on the amount of equity you have in your home. You then repay the loan with interest through monthly payments just like your first mortgage.

The interest rate is usually lower than a personal loan since it’s secured by your home, but you’ll typically need 20% equity and good credit to qualify.

How HELOCs work

A HELOC, or home equity line of credit, also allows you to borrow money using your equity, but it functions more like a credit card. You get approved for a certain amount in a revolving line of credit and can borrow money as you need it during a draw period, such as 10 years. You only accrue interest on the money you draw out.

During the repayment period you pay the money back with interest. HELOCs work well if you don’t need a lump sum but expect to need infusions of cash at different times in the future.

Reverse mortgages, home equity loans, and HELOCs: Key differences

All three of these options allow you to use your home equity to borrow money, but they differ in structure, eligibility, and repayment methods. It’s important to understand these differences so you can make an informed choice about which is best for your needs and goals.

Special requirements

Let’s start with reverse mortgages. These are only available for homeowners aged 62 and older and must be used on their primary residence. Additionally, HECM borrowers must complete a HUD-approved financial counseling seminar to ensure that they fully understand the terms of their loan.

By contrast, home equity loans and HELOCs don’t have any age restrictions. But they generally require 20% equity. Borrowers of these loans can typically access up to 85% of their home’s value, minus their outstanding mortgage balance.

Credit score and income

Reverse mortgages don’t have formal credit score or income minimums because your home is the collateral. HECMs do require a financial assessment to ensure the homeowner can pay property taxes, homeowners insurance, and maintenance on the home.

Home equity loans and HELOCs do usually have a credit score requirement which is typically at least 620. You’ll also need sufficient income, and lenders will assess your debt-to-income ratio (DTI). Rocket Mortgage®, for instance, requires a DTI of 45% or lower. This is to ensure you’re able to make your monthly payments.

Disbursement

The way you get money from each of these three types of loans is very different. With a home equity loan, you get one lump sum of money. It’s like personal loans, only typically with a lower interest rate.

With a HELOC, you qualify for a certain amount, then you draw money out as you want. This is more like a credit card.

A reverse mortgage, on the other hand, can go one of several ways. You could receive a lump sum, monthly payments, or a line of credit from which to draw. It depends on your lender and loan terms.

Repayment

If you take out a home equity loan, your payments begin immediately, just like your mortgage. You get a lump sum of cash and start paying back principal and interest right away.

HELOCs have two stages. The first is the draw period, during which you withdraw money as you need it. Then a repayment phase begins when you start paying back what you withdrew, plus interest.

You, or your heirs, don’t repay a reverse mortgage until one of several things happen: either you sell your home, you refinance it, you move out permanently, or you pass away.

How to choose between a reverse mortgage, home equity loan, and HELOC

Because these three loan types vary so significantly, it’s important to weigh each carefully to see which suits your financial picture and needs best. Here’s a helpful overview chart:

When a reverse mortgage may be best

If you’re an older homeowner who needs extra money every month to live more comfortably, and you’re trying to decide between a reverse mortgage vs. HELOC vs. home equity loan, a reverse mortgage could be the answer. It works well if you plan to stay in your home and don’t need to leave your home to heirs free and clear.

The extra cash from a reverse mortgage can be used for anything, from everyday expenses and healthcare costs to home repairs and more. You must continue to pay property taxes and homeowners insurance, however. Also, if you might want to sell your home later or leave it to heirs without debt attached to it, a reverse mortgage might not be the best vehicle.

Using a reverse mortgage can affect your eligibility for Medicaid or Supplemental Security Income. Plus, if you move to an assisted living or other long-term care facility, your home may not qualify as your primary residence any longer. This is why you should research this move carefully through reputable sources such as the Consumer Financial Protection Bureau.

When a home equity loan may be best

If you have a single, large expense, like a home renovation or repair, medical bills, or even a family vacation, the lump sum of a home equity loan might be ideal. It’s usually smarter than taking out a personal loan or using a credit card since it typically has a much lower interest rate.

Because of the lump sum and typical fixed interest rate, you’ll know what your monthly payment will be for the life of the loan. This and the low interest rate make it a popular tool to pay off higher interest rate loans and credit card balances, potentially saving hundreds or thousands.

When a HELOC may be best

If you’re a homeowner anticipating several expenses over many years, a HELOC might work best for you. For instance, if you plan to remodel your home in stages over the course of five years or more, you might not need the lump sum of a home equity loan immediately.

With a HELOC, you can withdraw what you need as you need it, only accruing interest on the funds you access. You also avoid borrowing too much money all at once.

You’ll want to plan carefully with a HELOC, however. When the draw period ends and the repayment period begins, you’ll have to make monthly payments. And because HELOC interest rates are often variable, planning for the contingency of higher interest rates in the future is important.

FAQ

Here are some quick answers to some common questions.

Is a reverse mortgage, home equity loan, or HELOC cheaper?

Reverse mortgages usually cost more upfront, while home equity loans and HELOCs often have lower fees and rates.

Which home equity tool is best for borrowers with bad credit?

Reverse mortgages are often easier to qualify for with bad credit than home equity loans or HELOCs.

Which option has the lowest interest rates?

HELOCs usually start with the lowest rates, though they vary, while home equity loans are fixed and reverse mortgages are higher.

The bottom line: The right financing option for you may not be right for everyone

Reverse mortgages, HELOCs, and home equity loans all have the same function. They allow you to use your home equity and put it to use without having to refinance or sell your home. However, they do this in very different ways, with varying qualification requirements, pros, and cons. It’s important to consider your unique financial situation when choosing one of these options.

If you’re interested in learning more about what you may qualify for, you can reach out to Rocket Mortgage® and apply for a home equity loan today.

¹Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 11/19/25 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Ameriprise products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.