A HELOC lender may freeze or cut your credit line if your home's value drops significantly or it reasonably believes your finances have changed for the worse (12 CFR 1026.40(f)(3)(vi), eCFR, checked October 14, 2026), while an unused HECM line of credit keeps growing (CFPB, last reviewed July 11, 2022).
The five options side by side
| Option | Monthly payment | Qualifying | Main risk |
|---|---|---|---|
| Home equity line of credit (HELOC) | Yes, often interest-only at first, then principal | Income and credit | Line frozen or cut; payment jumps or a balloon at the end |
| Home equity loan | Yes, fixed | Income and credit | Payments you must make for years |
| Reverse mortgage (HECM) | None required | Age 62, equity, financial assessment, counseling | Balance grows; due if taxes, insurance or occupancy rules are missed |
| Downsize | Depends on the next home | None | Moving costs; tax on gain above the exclusion |
| Sell and rent | Rent | None | Rent rises; tax on gain above the exclusion |
The CFPB lists a home equity loan or line of credit, refinancing, downsizing and lowering expenses as alternatives to weigh before a reverse mortgage, and notes that a home equity loan or line "might be a cheaper way to borrow" but usually has monthly payments and depends on income and credit (CFPB, Can anyone take out a reverse mortgage loan?, last reviewed August 28, 2026).
How a HELOC works, and the fine print for retirees
A HELOC has a draw period, when you borrow, and a repayment period. Some plans let you pay interest only during the draw period; afterward you may repay over a schedule, often 10 or 15 years, or owe a single balloon payment (CFPB, What you should know about home equity lines of credit, January 2014). If you cannot pay a balloon, you could lose your home (same source).
The line is not guaranteed to stay open. Federal rules let the lender stop new draws or reduce the limit if the home's value declines significantly below its appraised value, or if it reasonably believes you cannot repay because of a material change in your finances (12 CFR 1026.40(f)(3)(vi), eCFR, checked October 14, 2026). That tends to happen in a downturn, exactly when a retiree might want the money.
Taxes: HELOC and home equity loan interest is deductible only if the money is used to buy, build or substantially improve the home that secures it (IRS, Publication 936 (2025)). Interest on a reverse mortgage is generally not deductible as it accrues, and the loan advances are not taxable income (same publication).
How a reverse mortgage line differs
A Home Equity Conversion Mortgage (HECM) requires no monthly loan payment; interest and fees are added to the balance each month, so the balance grows and equity shrinks (CFPB, What is a reverse mortgage?, last reviewed August 28, 2026). With the adjustable-rate line of credit, the unused part keeps growing, and you pay interest only on what you draw (CFPB, payment options, last reviewed July 11, 2022).
The price is higher upfront. The CFPB says a reverse mortgage is typically more expensive than other home loans (CFPB, costs, last reviewed May 28, 2024). The main fixed costs are a 2% upfront FHA mortgage insurance premium on the maximum claim amount and 0.5% a year on the balance (HUD Mortgagee Letter 2017-12, effective October 2, 2017), plus an origination fee capped at $6,000 (24 CFR 206.31, checked October 14, 2026). Details are on reverse mortgage costs. You must still pay taxes, insurance and upkeep and live in the home; see reverse mortgage requirements.
Downsizing or selling: the tax side
Selling can unlock more cash than either loan, and often with little tax. You can exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly, if you owned and lived in the home as your main home for 2 of the last 5 years (IRS, Publication 523 (2025)). There is no separate over-55 exemption any more; see the over-55 rule. Estimate yours with the home sale capital gains calculator.
Long-time owners in high-value areas can have gain well above the exclusion. One option some sellers use to spread that extra gain is an installment sale: the buyer pays over time, and the seller reports gain as payments arrive rather than all in the year of sale (26 U.S.C. 453, Cornell LII, checked October 14, 2026; reported on Form 6252). The home sale exclusion is applied first, so only gain above it is spread. The trade-offs: you depend on the buyer's credit, the money arrives over years instead of at closing, the note can count as an asset or a transfer for Medicaid unless it meets the rules in 42 U.S.C. 1396p(c)(1)(I) (Cornell LII, checked October 14, 2026), and it has to be set up before closing. See Form 6252 and installment sales and selling a home with a large gain, and work with a tax professional.
Who each option tends to fit
- HELOC: steady income, a short-term need such as a repair, and a clear plan to repay within a few years.
- Home equity loan: a one-time amount and a preference for a fixed payment you can budget.
- Reverse mortgage: age 62 or older, a plan to stay for many years, the cash flow to pay taxes and insurance, and no strong wish to leave the house itself to heirs.
- Downsize or sell: a home that is more house than you need or want to maintain, or a move toward family or care in the next few years.
When a reverse mortgage can make sense against a HELOC: if a monthly payment would strain your budget in later years, or you want an unused credit line that grows over time rather than one a lender can freeze under the HELOC rules, the HECM's higher upfront cost may be worth it. If you may move within a few years, those upfront costs are hard to earn back. A HUD-approved HECM counselor can walk you through both at little or no cost; find one on HUD's counselor roster.
A plain example: $100,000 three ways
Hypothetical: a married couple, both 72, own an $800,000 home free and clear and want $100,000. All rates are hypothetical, not offers: HELOC 8.0% (interest-only for 10 years, then 20 years of payments), home equity loan 8.5% for 15 years, and a HECM growing at 7.0% a year (a hypothetical 6.5% note rate plus the 0.5% annual mortgage insurance premium from HUD Mortgagee Letter 2017-12). HECM upfront costs: 2% premium on $800,000 = $16,000, origination fee at the $6,000 cap (24 CFR 206.31), and $4,000 hypothetical third-party costs, so the HECM balance starts at $126,000. Their HECM principal limit would be $800,000 x 0.372 (age 72 at a hypothetical 7.0% expected rate, HUD PLF table effective October 2, 2017) = $297,600, so the $126,000 fits well inside it.
| After 10 years | Monthly payment | Paid in 10 years | Still owed |
|---|---|---|---|
| HELOC, interest-only | $667 | $80,040 | $100,000 (then $836 a month for 20 years) |
| Home equity loan, 15 years | $985 | $118,200 | $47,997 |
| Reverse mortgage (HECM) | $0 | $0 | $253,217 |
Arithmetic: HELOC $100,000 x 8% / 12 = $667 a month, x 120 months = $80,040. Home equity loan payment from the standard loan formula at 8.5% over 180 months = $985; after 120 payments the balance is $47,997. HECM: $126,000 x (1 + 0.07 / 12) to the 120th power = $253,217. The HECM costs the most in total but asks nothing of the monthly budget; the HELOC is cheapest only if the line stays open and the payments stay affordable.
Downsizing instead, hypothetically: sell for $800,000, pay 6% selling costs ($48,000), buy a $500,000 home, and $252,000 is freed before moving and purchase costs. With a $200,000 basis, the gain is $552,000; after the $500,000 joint exclusion (IRS Publication 523, 2025), $52,000 is taxable.
Red flags
- Comparing only interest rates and ignoring the reverse mortgage's upfront premium and origination fee.
- A HELOC pitched to a retiree with no plan for the payment jump when the draw period ends.
- Not asking whether the HELOC has a balloon payment at the end.
- Assuming a HELOC will be there in a downturn; lenders can freeze or cut it.
- Being told reverse mortgage money is "tax-free income" as if it were not a loan that grows.
- Taking a large reverse mortgage lump sum you do not need yet, which grows interest from day one.
- Ruling out selling without running the home sale exclusion numbers first.
- Refinancing into a new 30-year mortgage in your 70s without a plan for the payments.
- Anyone recommending you use home equity to buy an annuity or other investment product.
- Leaving a spouse off a reverse mortgage without understanding what happens to them later.
Questions to ask before you sign
- If I take a HELOC, what is my payment during the draw period and after it ends?
- Does this HELOC have a balloon payment, and when?
- Under what conditions can the lender freeze or reduce my line?
- For the reverse mortgage, what are the upfront costs in dollars, line by line?
- How much would the unused reverse mortgage line grow each year at today's note rate?
- How long do I expect to stay in this house, honestly?
- If we sold, what would our gain be after the $250,000 or $500,000 exclusion?
- Could my spouse stay in the home under each option if I die first?
- What will my heirs likely receive under each option?
- Have I talked with a HUD-approved counselor about all of these, not just one?
Long-Term Care and Your Home: Read This Before You Sign
A one-page checklist: what Medicare will and will not pay, the Medicaid look-back and estate recovery basics, the questions to ask before you buy long-term care coverage or take a reverse mortgage, and the tax rules if the house is sold. Reverse mortgage costs and questions, plus the home sale tax rules to check before you borrow against your home. We’ll email it to you.
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Sources
- eCFR: 12 CFR 1026.40, Requirements for home equity plans (checked October 14, 2026)
- CFPB: What you should know about home equity lines of credit (January 2014)
- CFPB: Can anyone take out a reverse mortgage loan? (last reviewed August 28, 2026)
- CFPB: How much money can I get with a reverse mortgage loan, and what are my payment options? (last reviewed July 11, 2022)
- CFPB: How much does a reverse mortgage loan cost? (last reviewed May 28, 2024)
- IRS: Publication 936 (2025), Home Mortgage Interest Deduction
- IRS: Publication 523 (2025), Selling Your Home
- Cornell LII: 26 U.S.C. 453, Installment method (checked October 14, 2026)
- Cornell LII: 42 U.S.C. 1396p, Liens, adjustments and recoveries, and transfers of assets (checked October 14, 2026)
- HUD: Mortgagee Letter 2017-12, HECM mortgage insurance premiums and principal limit factors (effective October 2, 2017)
The Retirement Literacy Foundation is a 501(c)(3) public charity. This page is general education, not tax, legal or investment advice. Nothing is sold here, no product is recommended, and RLF accepts no funding from financial companies. Rules and figures change; each one above shows its source and date. Check anything you plan to act on with your state insurance department or a qualified professional who is not paid on the product.