Retirement should be the time to slow down and enjoy your golden years doing things you love. But that’s something situational, depending on your financial stability and security. That happens only when you are ahead of retirement planning and long-term savings. However, things seldom happen according to plan.

According to Bankrate’s survey conducted in 2022, 55% of American workers stated they felt behind in retirement planning. Additionally, 35% felt significantly behind in this context. Nearly a quarter of the workforce had not made retirement contributions in a year, and 22% said they were not doing it in 2022 or 2023.

The numbers show that more than half of the American seniors live on the edge, waiting to get in trouble if a financial crisis hits. Your home can be a savior in such situations, giving access to much-needed funds. However, you may struggle to choose between home equity and reverse mortgages when it comes to tapping into funding through property.

Home Equity Loans and Reverse Mortgages: Digging Deep

The first step is to dig deep and understand both funding options thoroughly. Here are the facts you should consider:

Home Equity Loans

With a home equity loan, you use your home as collateral to borrow a lump sum. You pay a fixed interest rate on the borrowing and repay with a monthly payment over a specified term. These loans are ideal for retirees looking for one-time cash for specific expenses, such as medical bills and property renovation. A predictable repayment schedule is a valid reason for seniors to pick this option. 

Right now, home equity in the country is at a record high, with the average mortgage holder owning $185,000. The number soared by 35% in 2021 due to a rapid surge in house valuations. This increase means many homeowners may want to access some of the funds invested in their houses through home equity loans.

Reverse Mortgages

Reverse mortgages (Home Equity Conversion Mortgages) are loans for seniors (homeowners over 62), enabling them to convert a part of their home equity into cash. The difference here is that the borrowing does not require monthly repayments. 

The loan balance is repaid after the owner sells the property or passes away. Seniors can depend on this option for regular income to cover ongoing expenses without selling their home.

While reverse mortgage is a relatively lesser-used financial tool for seniors, its popularity is gradually increasing. California has the maximum number, with 11,921 total loans in 2020. Los Angeles County had a maximum of 3,068 reverse mortgages in 2020. The San Diego reverse mortgage landscape was also booming with 1,256 loans. Orange County came next with 1,145 loans.

Evaluate Your Requirements and Eligibility

Now that you understand the difference between the two options, you can easily pick the right one. Robison Home Loans recommends seeking expert opinion to evaluate your requirements and eligibility to make an informed decision. According to surveys, financial literacy in the US has fallen 19% over the past decade. It means almost every senior may need help and guidance.

Credit score and income requirements for home equity loans are typically stringent, making it challenging for seniors to qualify. Conversely, eligibility criteria are lenient for reverse mortgages, focusing on age, property value, and equity. The latter may be a better option, considering seniors do not have a regular income after retirement.

Weigh the Impact on Heirs and Estate Planning

Financial decisions during your golden years can affect your heirs and estate planning in the long run. You shouldn’t do anything that may influence their financial future or diminish the value of their inheritance.

Recent numbers show that one in three seniors in the country has a documented estate plan, but 56% consider it crucial. With a growing awareness, this factor becomes a critical part of the choice between home equity loans and reverse mortgages.

With a home equity loan, the debt is the responsibility of the borrower and their estate after their passing. Heirs may need to sell the property for loan repayment, potentially reducing the inheritance left for the family. A reverse mortgage is a non-recourse loan, indicating that the debt is confined to the home's value. It protects the heirs from owing more than the property’s value. 

The Bottom Line

Home equity loans and reverse mortgages are complex financial products, specifically for seniors without adequate financial literacy. Professional guidance and counseling are your best bet when it comes to evaluating your options and choosing the best one. 

Weigh the pros and cons of both to choose wisely and safeguard your financial future from debt burden. Also, stick with the option that best matches your needs and goals.Couple holding mugs