Reverse Mortgage vs. Selling Your Home: Which One Should You Choose?
By: Courtney Jorstad
February 5, 2023 • 5 minute read
Retirement is a time for making several major decisions.
One of the biggest decisions that retirees must make is where to live:
- Do you want to stay in your current home?
- Do you want to stay in the same area but downsize to a smaller home?
- Do you want to relocate to another city to be closer to family or to live in a warmer climate?
- Do you have plans to move in with your children or other family members?
And the options could go on.
Retirees may also be looking for ways to offset costs during retirement.
If you’ve lived in your home for a significant amount of time, you likely have significant equity in your home. Two options for accessing that equity are a reverse mortgage and selling the home.
Let’s look at both options and evaluate which one makes sense for your situation as well as how they relate to the question of where to live.
Reverse Mortgage: What is it and How Does it Work?
A reverse mortgage is a unique financial product that is only available to homeowners who are a minimum of 62 years of age. It is a loan, just like a traditional mortgage, that is borrowed against the equity in the home.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM).
With a HECM reverse mortgage loan, instead of paying the loan back each month in the form of monthly payments, the bank will give you funds in the form of a lump sum, monthly payments, a line of credit, or a combination of the three.
If you still have a traditional mortgage on the home when you take out a reverse mortgage, it will also pay off that mortgage and eliminate your monthly mortgage payments.
There are no rules about how the money may be used. How you receive the money will depend on your needs.
For example, if you have major projects you would like to work on such as home renovations, you may opt to receive the money as a lump sum. If you are looking to supplement your income, you may decide to receive the money in the form of monthly payments. If you don’t have any immediate plans for the money but want to have the money available to pay for unexpected expenses, then a line of credit may be the way to go.
A reverse mortgage doesn’t require monthly payments to pay it back. A reverse mortgage is paid back when the borrowers sell the home, leave the home for more than 12 months, or pass away.
What are the Benefits of a Reverse Mortgage
A reverse mortgage is a good idea for those who want a way to access their home’s equity, but also want to stay in their current home for their retirement.
There are advantages to staying in your home in retirement. For example, you are able to remain in the same area where you already have an established community.
While retirement communities abound throughout warmer climates in states like Florida, Arizona, and California, the truth is that the majority of Americans opt to retire in place. A long-term study by the Center for Retirement Research at Boston College found that only 7% of retired Americans move each year.
It can also be costly to move. Once you add up real estate commissions, taxes, fees, and the cost of moving, you may not save as much money as you were hoping.
The funds from a reverse mortgage can be used to make any necessary modifications you may need as you get older such as installing handrails and making showers more accessible.
Homeowners who do wish to relocate can use a reverse mortgage to purchase a home. This is known as a reverse mortgage for purchase, or HECM for purchase.
With a HECM for purchase, you are able to use the proceeds from a reverse mortgage to buy a new home. This may be a good option for those who want to move to downsize or relocate but don’t want to take on additional mortgage payments.
Selling Your Home: What are the Benefits?
Another option for accessing the equity in your home is to sell the home and keep the proceeds.
After selling, you can then decide to rent, move in with family members (if that’s an option for you), or move to a community that includes homes in which the maintenance is provided.
This may be a good option if you no longer want the responsibilities of home ownership in retirement. By comparison, if you take out a reverse mortgage, you are still responsible for the property taxes, homeowner’s insurance, and maintaining the home.
Selling the home may also be a good option if you are looking to seriously downsize or move to an area where homes are significantly less than where you currently live. If you have significant equity in your home, you may be able to make enough money from the sale of the home so that you would be able to pay for a home outright, without having to take out a mortgage.
This could help offset costs by eliminating the need for a monthly mortgage payment. But just like with a reverse mortgage, you will still be responsible for paying the taxes, insurance, and home maintenance.
Reverse Mortgage vs. Selling Your Home: Which One is Right for You?
Whether you decide to get a reverse mortgage or sell your home, the decision comes down to assessing your needs.
If you are wanting to stay in your current home, and you have a need for additional funds to supplement your income, pay for major projects or renovations, or have an additional emergency fund, then a reverse mortgage may be the way to go.
If you are ready to be done with home ownership and you are ready to cash in on your investment, then selling your home may be the way to go.
It is recommended that you discuss these decisions with your financial advisor and/or your family members who may be impacted by your decision.
One of our goals is to make major financial decisions a little bit easier by providing reviews of the top service providers.
If you are ready to move forward with a reverse mortgage, we’ve curated a list of the top reverse mortgage lenders right here.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.