Should You Get a Home Equity Loan or a Reverse Mortgage?

Whether you decide to move to assisted living or stick with aging in place, senior care gets expensive. Even after all those years you spent working hard and saving for retirement, you could still find yourself facing a tough financial situation in your senior years.

For many seniors, the solution to the high cost of senior care is in an investment made many years ago: your home. Depending on your situation, your house could become a valuable asset to helping you pay for the type of care you need.

Figuring out the best way to go about turning your investment in your home into money you can use can be complicated though. You actually have a lot of options, each one of them with different benefits and drawbacks. This post will give you a rundown on two of the popular options available to seniors and how they compare.

What is a Home Equity Loan?

Home equity loans and home equity lines of credit are loans that banks make to homeowners that treat the house as collateral on the loan. Your typical home equity loan works just like any other loan, you take a big, lump sum all at once and pay it off in smaller monthly increments. Home equity lines of credit allow you to take out smaller amounts at a time, as you need the money, until you get up to the maximum amount approved.

Either way, you will need to stay current on the minimum monthly payment each month in order to keep your home, but home equity loans are often attractive because the fees are fairly low in comparison to other types of loans. And they offer some flexibility that not all options do, as you can take out a home equity loan whether or not you continue to live in your home or use the money to move into a senior care facility.

The Benefits of a Home Equity Loan

• You can get a home equity loan whether you continue to live in your home or move into an assisted care facility.
• The fees for home equity loans are typically lower than with other types of loans.
• The interest you pay on home equity loans is usually tax deductible.
• People can qualify for a home equity loan at any age.

The Drawbacks of a Home Equity Loan

• If you don’t make your minimum payments, you’ll lose your home.
• As with any loan, you’ll be paying back more than you borrow.

Who It’s Best For

While the list of drawbacks seems short, the possibility of losing your home is a pretty big risk to take. Home equity loans are best for people who are confident they’ll be able to make the monthly payments and pay back the loan in full within the allotted time. That means if you plan to move into a senior care facility for the long term and don’t have any expectations of increased future income, then it would likely make more sense to sell your house than borrow on it.

Home equity loans make the most sense for people who:

• Need help paying for a home modification that will enable them to age in place, like a walk-in tub or stair lift.
• Need the money to cover the cost of temporary care, like a stay in a nursing home while recovering from an injury.
• Could use help with expenses while waiting for expected income to come through. For example, if you are waiting to find a renter for your home after a move to assisted living.
• Are part of a mixed age couple in which one of the spouses is too young to qualify for a reverse mortgage.

No one should take the decision to get a home equity loan lightly. Your home likely means a lot to you and is one of your most important financial assets. But in the cases where it’s the best option, it can be very useful.

What is a Reverse Mortgage?

For a lot of seniors, reverse mortgages are the best option. Instead of having to pay back a loan in monthly sums, the bank pays you a set monthly amount for as long as the reverse mortgage lasts. For seniors who aren’t concerned about keeping the house in the family after they pass, a reverse mortgage helps with general life expenses for their remaining years.

Reverse mortgages are only available to seniors over the age of 62 and they come with some significant legal protections to minimize the risk for seniors. As long as a senior over 62 owns their home, they’re easy to qualify for and you’re not expected to pay the loan off in your lifetime unless you choose to sell your home.

You are expected to continue living in your home for as long as the reverse mortgage lasts, meaning that if you expect to move to assisted living in the near future, a reverse mortgage doesn’t make much sense. If your goal is to age in place and you plan on sticking with in-home care when the time comes that you need more help, then it may be be a smart move.

The Benefits of a Reverse Mortgage

• You’re not expected to pay it off during your lifetime, unless you sell the house.
• Getting approved is easy as long as you’re at least 62 and own your home.
• The government provides legal protections that ensure a senior can never owe more on the loan than your home is worth. Your family should have no problem paying off the loan by selling the house.
• Receiving a monthly amount can make a big difference to helping cover general life expenses.

The Drawbacks of a Reverse Mortgage

• The monthly payments can’t go on forever, you’ll only receive them up to the point where the bank has paid out what the house is worth. If you live beyond that point, you could be left without either the monthly payments or the home.
• You won’t be able to leave the house to your loved ones. They’ll have to sell it after you pass to cover the cost of the loan (unless one of them is willing and able to pay it off outright).
• You have to continue to live in your home to receive the monthly payments. The moment you move out, you’re expected to start paying the loan back. If you therefore end up deciding to move into an assisted living facility soon after taking out a reverse mortgage, it doesn’t work out to a good deal.

Who It’s Best For

A reverse mortgage makes sense for any senior who plans to age in place, but could use some help covering the day-to-day expenses in their senior years. It’s smart to hold off on getting a reverse mortgage for as long as possible so you don’t risk using up the equity on your home early, but if you could use a little financial help in your remaining years, a reverse mortgage can be a useful windfall.

Which is Right For You?

If you’re still not sure which one makes the most sense for you and your family, consider brining some professionals into the mix. Talk to a real estate expert to make sure you understand what your house is really worth. Meet with a financial advisor to see what they recommend. A decision this big shouldn’t be taken lightly, but it’s smart to fully understand your options.

SeniorAdvisor.com Staff

Senior Advisor's knowledgeable writers blog about senior care services, trends and more.