Home Equity Agreement vs. Reverse Mortgages: What To Choose?

Saving money on home equity agreement reverse does not have to be complicated. We rounded up the essentials so you can spend less and skip the guesswork.

Key Takeaways

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• You’ve just entered retirement, or you’re a few years in, and the numbers aren’t adding up.

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You’ve just entered retirement, or you’re a few years in, and the numbers aren’t adding up. Maybe your savings didn’t grow like you hoped. Maybe a fixed income isn’t enough to keep up with rising costs.

Your home might be your biggest asset, but that equity doesn’t help with day-to-day expenses.

Taking on debt, like a HELOC, might not feel right. It may not even be possible if you have limited income or a lower credit score.

That’s why numerous retirees start looking at reverse mortgages and a home equity agreement. Both offer a way to get cash without monthly payments.

On the surface, they can seem like rational fixes for a cash crunch. But they work very differently, and choosing the wrong one could end up costing far more than expected.

I wanted to write this article because I’m seeing more and more retirees, along with their adult children, facing this exact decision.

My goal is to explain both options in plain English and outline the key trade offs to help you decide what’s right for your situation. In some cases, the best option may be neither.

Summary: Reverse mortgages typically make more sense if you want to stay in your home long term. Home equity agreements might feel easier and give quicker access to cash, but they can cost more over time, especially if your home goes up in value. That said, they may offer more flexibility if your goal is to pass the home on to your family. The right choice depends on your full financial picture, not just a need for cash right now. 

Prefer to watch?

In this video, I walk through the core differences between a home equity agreement and a reverse mortgage and why choosing the wrong one can cost you tens of thousands of dollars.

Home Equity Agreement: Sell a Slice of Your Future Home’s Value

A home equity agreement (HEA) lets you tap into your home’s value without taking on debt or making monthly payments. Instead of borrowing money, you agree to share a portion of your home’s future value in exchange for cash today.

Think of it like this: you might get 10% of your home’s current value in cash, but owe back 20% of its future value in 10 years. 

This is an oversimplified example, but it offers a useful starting point for understanding how numerous of these agreements work, even though terms vary by provider. What’s key to keep in mind is that it’s not a 1:1 deal. You’re trading some of your equity now for a potentially much larger share of your home’s future proceeds.

Repayment typically happens when you sell your home, refinance, or reach the end of the agreement, which is frequently 10 to 30 years. If you have the money, providers let you purchase out the agreement early.

Because they’re easier to qualify for than traditional loans, HEAs can appeal to homeowners with low income or limited credit. 

But as I explain in my guide to the pros and cons of home equity investments, the true cost can be hard to predict, especially if your home rises sharply in value.

Pros:

• Can be set up faster than a reverse mortgage.
• Fewer restrictions on how you use the money.
• Good option if you plan to sell the home soon.
• Available to homeowners under age 62.
• May allow your family to keep the home if you purchase out the agreement later.
• Not affected by rising interest rates like reverse mortgages are.

Cons

• Agreements have a repayment clock (frequently 10-30 years).
• Complex contracts with limited legal protections.
• Not available nationwide.
• Hard to compare different providers, as each uses its own formula for calculating repayment.
• A large upfront payment can affect Medicaid eligibility and is harder to plan around than the smaller, flexible payments offered by some reverse mortgages.

Ultimately, a home equity agreement is only as good as the offer you receive. Terms vary widely by provider, so it’s key to shop around. To help you compare your options, we’ve reviewed the best home equity agreement companies and broken down the fine print in our in-depth reviews. Check out our guides to Point, Unison, Splitero, Unlock, and Hometap, or start with our full roundup of the top home equity sharing companies for a side-by-side comparison.

Reverse Mortgage: A Government-Backed, Payment-Free Loan

Reverse mortgages are frequently used to solve the same problem as home equity agreements: a cash crunch in retirement. 

At its core, a reverse mortgage is a loan designed for older homeowners who want to turn home equity into cash without having to repay it each month. 

As long as you live in the home and meet basic requirements, like staying current on taxes and insurance, no payments are due. The loan is repaid when you move out, sell the home, or pass away, typically through the sale of the home.

Example: A retired couple in their 70s who own their $400,000 home outright. They take out a reverse mortgage and receive $200,000 upfront.  Over time, interest and fees increase the reverse mortgage balance to $300,000. When the home is eventually sold for $500,000, the remaining $200,000 in equity goes to the homeowner if they move out and sell, or to their estate if they pass away while still living in the home.

The most common type is a Home Equity Conversion Mortgage (HECM), which is federally insured and regulated by HUD. Counseling from a HUD-approved provider is required before the loan can be finalized.

To qualify for a reverse mortgage backed by the FHA, you must be at least 62 years old at the time you apply. If you’re applying with a spouse, both of you typically need to be 62 or older (unless one is designated as a non-borrowing spouse under HUD rules). 

There’s no official minimum equity requirement for a reverse mortgage, but in practice, most lenders require that you own at least 50% to 60% of your home’s value.

You can take the money as a lump sum, monthly payments, or a line of credit that grows over time. That line of credit feature is frequently overlooked, but it can provide a lot of flexibility.

Pros

• Comes with standard disclosures, built-in consumer protections, and HUD oversight.
• Your heirs won’t owe more than the value of the home when it’s sold.
• Offers flexibility to access more funds in the future, not just upfront.
• Repayment can be deferred as long as you live in the home and meet basic conditions.

Cons

• More negatively impacted by a high-interest-rate environment, which reduces how much you can borrow and costs overtime. 
• The application and required counseling process can take time, so if you’re facing an urgent deadline, like preventing foreclosure, a reverse mortgage may not move fast enough.

Quick Comparison Guide:

FeatureHome Equity Agreement (HEA)Reverse Mortgage (HECM)What Is ItSell a share of your future home value for cash todayTake a loan against your home equity that doesn’t require monthly paymentsAge RequirementNoneMust be 62 or older at time of applicationMonthly PaymentsNoneNone (as long as you stay current on taxes, insurance, and upkeep)Repayment TimingWhen you sell, refinance, or hit the agreement’s term (typically 10-30 years)When you move out, sell the home, or pass awayRepayment StructureShare of future value or appreciation (varies by provider)Loan balance grows with interest and fees, paid back from home sale proceedsCredit/Income RequirementsGenerally easier to qualify (low or no income/credit OK)

Final Thoughts

Before you check out, double-check home equity agreement reverse against current offers and any coupons you can stack. Small habits like this add up to real savings over a year.

Originally published at thewaystowealth.com.