Reverse Mortgage (HECM) vs. HELOC: What’s the Difference?

Being a homeowner has many advantages, and one of the greatest is the ability to build equity. Once you have a substantial amount of equity, you may be able to tap into it and access cash — often at a much lower interest rate than your typical loan.

Two of the most common ways to access your equity are a home equity conversion mortgage (or HECM) and a home equity line of credit (HELOC). Take a closer look at each one so you can decide which is best for you.

HECM (or Reverse Mortgage)

A reverse mortgage is exactly what it sounds like. In a traditional (or “forward”) mortgage, you make monthly mortgage payments to your lender. With a reverse mortgage, the lender pays you in return for a stake in your home.

This might sound like free money. However, while you don’t make payments toward a reverse mortgage over the life of the loan, the full amount becomes due when you die, sell the home, or move out. In most cases, a borrower’s heirs will sell the home and use it to pay off the loan after the borrower has died.

With a reverse mortgage, you have some flexibility in how you receive your funds. You can usually choose between a lump sum, regular (usually monthly) installments, and a line of credit. Many homeowners choose to receive monthly payments to have a reliable source of income each month.

These are some of the main advantages of a reverse mortgage:

• You don’t have to pay income tax on the money you receive
• It’s usually easier to qualify than it is for other kinds of credit
• You don’t have to pay toward the loan during your lifetime
• It allows you to remain in your current home

However, reverse mortgages also have their downsides:

• Reverse mortgages with high interest rates can snowball over time
• The interest on the loan usually isn’t tax-deductible
• It may create a hassle for your heirs
• If you end up having to move into a nursing home, the loan becomes due

Before you start weighing the advantages and disadvantages of a HECM vs. a HELOC, you should check to see whether you’re eligible for a HECM. You must be at least 62, and only certain types of properties are eligible.

HELOC

You might already be familiar with home equity loans. HELOCs are similar, but instead of receiving your funds all at once, you’re given a line of credit that you use only if you need it.

However, HELOCs work a little differently from most credit accounts. When you get a HELOC, it’s divided into two periods: a draw period and a repayment period.

The draw period (usually about 5 to 10 years) is when you may withdraw funds as needed, and you only make payments on the interest accumulated. The repayment period is usually 10 to 20 years, and you’ll need to pay both interest and principal.

Here’s a look at some of the benefits of a HELOC:

• Because you only draw what you need, you can minimize the interest you pay
• Interest rates are lower than those of many other credit products
• The draw period allows you to make smaller payments
• You don’t have to meet age requirements to qualify

HELOCs also come with a few cons:

• Most have a variable rate, so payments can increase over time
• You must meet more stringent credit requirements to qualify
• If you’re unable to pay, you risk losing your home

You should also keep in mind that when the repayment period begins and your payments include interest and principal, you may owe significantly more per month.

Making the Decision

HECMs and HELOCs aren’t your only two options for accessing your home’s equity in retirement, but they’re two of the most popular. When determining which is the better option for you, make sure to take the following factors into account:

• Your age
• Your credit score and history
• How much equity you have
• Whether you want to stay in your home
• What you intend to use the loan proceeds for
• Your heirs and their ability to handle a home sale

It’s also not a bad idea to speak to a financial professional. They can help you assess your situation and determine which option may be the right one.

How the HECM Line of Credit Grows

One of the biggest advantages of a HECM line of credit is that your available borrowing power actually increases over time. Any unused funds grow at the same rate as your loan’s interest plus the FHA’s mortgage insurance premium (MIP). In other words, if your note rate is 4% and the MIP is 0.5%, your unused credit line grows by about 4.5% annually.

That means the longer you keep the credit line open without using it, the more you’ll be able to access later — a feature that standard HELOCs simply don’t offer. With a HELOC, your available balance only decreases as you borrow and pay back funds.

Who Each Option Fits Best

• HECM (Reverse Mortgage): Best for homeowners age 62 or older who want to remain in their homes long-term. It provides steady income or flexible funds without monthly payments, making it ideal for retirees who value stability and are less concerned about leaving behind maximum home equity.
• HELOC: A better fit for younger borrowers with strong credit who plan to use equity for shorter-term needs like renovations, tuition, or debt consolidation. Because HELOCs require monthly payments and eventually full repayment, they suit those still earning income and comfortable with ongoing obligations.

Concrete Example

Let’s compare how a HECM and a HELOC might work for the same homeowner:

Scenario:

Mary is 65, owns a $400,000 home outright, and wants to tap into her equity.

Option 1: HECM (Reverse Mortgage)

• Mary could qualify for a reverse mortgage that provides her with around $200,000 in available funds (depending on rates and program details).
• She can choose to take monthly payments of roughly $1,000–$1,200, set up a growing line of credit, or take part of the money as a lump sum.
• She doesn’t make monthly loan payments, but her loan balance grows over time and will be repaid when she moves, sells, or passes away.

Option 2: HELOC

• Mary could qualify for a $200,000 HELOC based on her home’s equity and her credit score.
• For the first 10 years (the draw period), she can borrow as needed and make interest-only payments — maybe $500–$700 a month, depending on rates.
• After the draw period, her payments rise significantly as she begins repaying both principal and interest.

This side-by-side comparison shows the trade-offs: the HECM removes monthly payments but reduces future equity, while the HELOC preserves equity but requires monthly repayment.

FAQs

Can you have both a reverse mortgage and a HELOC?

Not on the same property. Because a reverse mortgage must be in first lien position, you can’t also have a HELOC on that home. However, if you own another property free and clear, you could potentially have a HELOC on one property and a reverse mortgage on another.

Which has lower costs, a HELOC or a reverse mortgage?

Upfront costs are usually lower for a HELOC. Reverse mortgages involve higher closing costs, including FHA mortgage insurance premiums. However, HELOCs carry ongoing monthly payments and variable rates that can rise over time, while a reverse mortgage eliminates monthly mortgage payments. The better option depends on your priorities and timeline.

What happens to my HELOC or reverse mortgage when I die?

With a HELOC, your heirs must continue making payments or pay off the balance in full, or the lender may foreclose. With a reverse mortgage, the loan becomes due, but your heirs have options: they can sell the home, refinance to pay off the balance, or pay 95% of the home’s current value to keep it. Neither loan type transfers personal debt to heirs beyond the home itself.

Side by Side Comparison

Thinking About a HECM or HELOC?

At South River Mortgage, we understand how stressful planning for retirement can be — and financial stress is often the greatest of all. We’ve helped countless people build the retirements they deserve, and we may be able to help you, too. If you want to learn more about your options, get in touch today.