When in need of extra cash, one option is to make use of home equity. Two of the best loan options tied to home equity are the reverse mortgage and the home equity loan. While both of these financial products allow homeowners access to their home equity, there are many differences between reverse mortgages and home equity loans. To find out which is the best solution for your financial situation, it is important to weigh the advantages and disadvantages of both of these financial products. Here are some of the factors to consider when choosing between getting a home equity loan or a reverse mortgage:

Qualification

It is impossible to get a reverse mortgage or a home equity loan without qualifying for them first. To qualify for a reverse mortgage, the homeowner must be at least 62 years old and own a single-family home, condominium, 2-4 unit property, or townhouse. Some reverse mortgage lenders may have specific requirements, so be sure to inquire to see if you qualify for reverse mortgages. Home equity loans usually have strict requirements for qualification. Most lenders require homeowners to have a good credit line, a source of income, and a good home equity standing. In general, it is easier to qualify for reverse mortgages if the homeowner is 62 years old or older.

Loan types

Reverse mortgage lenders pay homeowners in one of four ways: lump sum, periodic payment, line of credit, or a combination plan. Combination plans offer much flexibility, because homeowners can choose to receive a partial lump sum and have the rest of the loan paid periodically. Income received from reverse mortgages is usually tax free. Home equity loans, on the other hand, are either given in lump sum or line of credit. Depending on the homeowner’s qualifications, he or she may be eligible for open-end home equity loans that allow the homeowner to choose when and how the proceeds of the loan are paid to him or her.

Expenses

Perhaps the most important factor to consider when choosing between reverse mortgages and home equity loans is the expense. While reverse mortgages have high upfront fees, the costs of reverse mortgages cannot exceed the total value of the home. Payments for reverse mortgages are not due until the homeowner moves, sell the property, or dies. Home equity loans usually require monthly payments. When those payments are not made, debt is incurred, lowering the home equity. Basically, reverse mortgages may be easier to handle financially, but those with a steady source of income may want to opt for home equity loans to avoid the high upfront fees of reverse mortgages.