When looking at refinancing options for your home through the FHA (Federal Housing Administration,) you may find yourself questioning the difference between Reverse Mortgages and Home Equity Loans. At first glance, these two FHA loan types may seem quite similar but upon further investigation, you’ll find that each refinancing option differs greatly in benefits, qualifications and end results. To help clear any confusion and assist our readers in understanding each of these FHA home loan options, we’ve created this guide listing the key differences between reverse and equity home mortgage types and the unique qualification requirements necessary to use these as a refinancing option for your home.

Equity Explained

To understand a reverse or home equity loan, one must first understand what equity is and how it is acquired. To put it simply, equity is the financial value of a home without the owed mortgage or attached loan amounts. Equity can change based on the surrounding real estate market but essentially it is the value of your home based on a surrounding area and how much of a mortgage has been paid off. Those who have lived in their homes for several years may have acquired a large amount of equity.

Home Equity Loans

While researching FHA home refinancing options, you may have stumbled across the term Home Equity Loan or a Cash-Out Refinance. These two terms are one in the same and both refer to using the acquired equity in a home to receive monetary credit. Ideally, this type of home mortgage refinance is used to gain lower interest rates as well as financial benefits based off the built equity in a home.

This type of home mortgage allows homeowners to utilize the equity within their home, gaining monetary compensation in the form of a large sum (up to 85% of a home’s appraised value,) or as a line of credit to be paid over time. However, home equity loans do not provide free money… the fiscal amount taken out on the home’s equity is rolled into the home mortgage, to be paid over the life of the loan. If you are considering this type of loan, it is recommended to wait to refinance until a large amount of equity has been built up, therefore providing the highest amount of fiscal gain.

Reverse Mortgage Loans

Reverse mortgages work quite differently from home equity loans because unlike the received fiscal amount needing to be repaid over the life of a loan, those who take out a reverse mortgage do not need to worry about monthly, on time payments. This is possible because FHA reverse mortgages are meant to help those who are retiring and have paid into (or off) their home mortgages and built up equity over several years.

The requirements for a reverse mortgage loan state that homeowners must be over the age of 62 and have built up a substantial amount of home equity while claiming the home to be “refinanced” as a primary residence. Essentially this type of home loan provides financial support to those over the age of 62 who may wish to supplement their expenses. Reverse mortgages offer the option to receive monthly, quarterly, large sum or predefined payments based on the homeowner’s financial needs.

FHA Reverse Mortgages and FHA Home Equity Loans

If you were questioning the difference between Reverse Mortgages and Home Equity Loans, we hope this article has helped. Please remember that our friendly staff of expert loan officers can always answer any further questions, comments or concerns you may have.

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