Home Equity, HELOCs & Reverse Mortgages
Three ways to turn equity into cash, and the payment shock each one hides.
Equity is an asset you cannot spend
The only ways to access it are borrowing against it or selling. Each route has a different cost, a different risk and a different effect on what you eventually leave behind. Choosing between them is mostly about how long you intend to stay and how certain your income is.
A HELOC is a variable-rate revolving line
You draw what you need during a draw period, paying interest only. That payment feels comfortable and does nothing to the balance. When the draw period ends, principal repayment begins and the payment can roughly triple. Because the rate is usually variable, a rate rise compounds that shock.
A home equity loan is a fixed lump sum
Fixed rate, fixed term, predictable payment. It suits a known cost such as a defined renovation. It suits an uncertain cost badly, because you pay interest on the full amount from day one whether you needed it all or not.
A reverse mortgage runs the arithmetic backwards
No payments are made, so the balance compounds. The amount available depends on age, home value and rates through a principal limit factor. Property tax, insurance and maintenance remain your obligation, and failing to meet them can trigger default and foreclosure on a loan you thought had no payments.
What it costs the estate
With a reverse mortgage the balance grows while the home may or may not appreciate faster. Whether equity remains for heirs depends on which line wins over your actual time in the property. Heirs can repay the loan and keep the house, or sell it, but they cannot ignore it.
Common questions
Is home equity debt still tax deductible?
Only where proceeds are used to buy, build or substantially improve the home securing the loan, subject to limits.
What happens if property values fall?
A HELOC lender can freeze or reduce an undrawn line. On a reverse mortgage, non-recourse protections generally mean the estate does not owe more than the home is worth.