When talking about financial products, terms, and concepts, it is easy to get confused and lost in all of the numbers and jargon. Reverse mortgages and home equity loans are two financial products that can easily cause confusion, because they are similar to one another. The similarity between these two financial products is that they both allow homeowners to take advantage of their home equity. This article will provide some basic information on home equity, reverse mortgages, and home equity loans.

What is home equity?

In the most basic terms, home equity is the value of a home. To calculate home equity, the mortgage and other debts attached to the home are deducted from the market value of the home. Home equity can either appreciate or depreciate based on a number of factors. For example, when homeowners pay mortgage or if the property goes up in value, then the home equity increases. Failing to make mortgage payments or taking out extra loans attached to the home can lead to increased debt and, in effect, decreased home equity.

What are reverse mortgages?

Getting reverse mortgages is one way to tap into one’s home equity as a source of cash. In a reverse mortgage, homeowners give part of their home equity to receive payments from a lender. The concept of reverse mortgage lenders paying money to the homeowner is “reversed” based on the concept of normal mortgages, wherein homeowners pay mortgage lenders. In order to get a reverse balance, the mortgage on the home must be fully paid off. Since homeowners can use the proceeds of the reverse mortgage for anything, they can use part of the proceeds to pay off the remaining mortgage and debts tied to the home. Payment for the reverse mortgage is deferred until the homeowner sells the home, no longer lives in the home, or when rights to the property change.

What are home equity loans?

Home equity loans are often referred to as second mortgages, because that is essentially what they are. When homeowners get a home equity loan, they are essentially making use of their home equity as collateral for the loan. Since home equity loans decrease the actual home equity, homeowners are obliged to make monthly payments in order to keep their home equity balanced. Even with the equity loan lowest rate, home equity loans can be difficult to deal with if you don’t have a steady source of income. Mortgage lenders can loan to homeowners in lump sum or as a line of credit, commonly called a home equity line of credit (HELOC).