The decision to take out a reverse mortgage may stem from a variety of reasons, whether it’s a desire to stay in your home or the need for extra cash flow.
When facing the decision to take out a reverse mortgage or sell your home, there are a few factors to weigh. Each option has its own pros and cons and can vary depending on your particular situation.
Pros & Cons of Selling Staying with a Reverse Mortgage
Perhaps the most important thing to consider is your ultimate goal for your future living situation, whether you’re looking to downsize, relocate, or rent.
PRO: Stay at home
People overwhelmingly want to stay in their homes as they age: AARP studies consistently show that about nine in ten older Americans want to age in place.
A reverse mortgage is a financial tool that can enable you to do so. The federally-insured Home Equity Conversion Mortgage (HECM) program allows homeowners aged 62 and older to borrow against the equity they’ve built up in their home.
Borrowers retain the title to their home, and the loan term goes until you die or leave your home, as long as you maintain your property and remain current with property taxes and homeowners insurance.
You must be sure that with the reverse mortgage and other income streams that you are comfortable with these basic property expenses as to not pay them represents a default on the loan.
PRO: Increased cash flow
If you’re “house rich, cash poor,” a reverse mortgage is a tax-free way to use your home equity to supplement your income. You can opt to access your loan proceeds in a variety of formats, whether it’s a lump sum, monthly payments, or a line of credit.
Borrowers also use their proceeds to make the home more age-friendly. Smart borrowers use some funds to convert their landscaping into less care-intensive options, install grab bars and other features that will make the home more accessible for them later in life.
PRO: Use a HECM to move
If you are interested in a reverse mortgage but you also would like to downsize or relocate, consider the HECM for Purchase. This program allows you to buy a new home and take out a reverse mortgage within a single transaction, which can help save on time, paperwork, and closing costs.
PRO: Healthcare at home
As people age, their health needs may increase. With a reverse mortgage, your loan proceeds can be used to pay for home care and/or home modifications to help you age in place.
CON: Home maintenance
Many times as people age, they become less able to maintain a home or a property. However, with the proceeds from your loan, you have the option of hiring a company to do house cleaning or yard work.
CON: Costs of origination
There are several costs associated with taking out a reverse mortgage, including origination, appraisal, and title insurance fees. However, you are usually able to finance most of those fees into your loan, rather than needing to pay them out of pocket.
CON: The loan must be paid back
Although a reverse mortgage is very different from a “forward” mortgage, it still accrues interest over time and has to eventually be paid back. Many times, this is done by selling your home and using the proceeds to pay back the lender. Your estate may be responsible for this process, and adult children are sometimes unhappy at the prospect of not receiving the home as inheritance.
However, you or your heirs are able to keep whatever’s left from the sale of your home, once the loan is repaid. While there is no payment due on the loan while you live in the property, borrowers may choose to make a payment in any amount at any time and this keeps the interest accrual lower and the equity higher.
After all, you are not giving your home to the bank, you are only accruing interest on the loan and deferring payment of that interest. If you are able to pay it and would like to do so to keep the equity higher longer, you can certainly do so.
Pros & Cons of Selling Your Home
PRO: Ability to downsize
If you’re looking to downsize or move into a place that’s more suited for your lifestyle, then selling your current home may be the most appealing option. A reverse mortgage might also help in this instance though because you can also use a reverse mortgage to purchase your next home.
PRO: Less responsibility
One benefit of renting rather than owning is that you won’t have obligations associated with being a homeowner. Those obligations include property maintenance and home repairs along with related taxes and insurance.
The process of moving is time consuming, often expensive, and rarely fun. If you do sell your house, you may need to hire movers to help you pack and organize your belongings and transport them to your new residence, where everything needs to be unpacked.
There are costs associated with listing and selling your home that many people do not consider. Just as there are costs associated with obtaining a reverse mortgage, according to Opendoor.com. While the average costs to pay a real estate agent tend to hover around 5 or 6%, when you factor in all the costs associated with the sale (staging, repairs, relocating, etc.), the true cost is closer to 10%.
CON: Ongoing rent expense
If you end up renting after selling your home instead of buying another one, you’ll need to pay rent each month—and it’s possible that rent may increase as time goes on, presenting a variable cost. Alternately, you may not be able to renew your lease and be forced to move again. Rents have increased in recent years tremendously and many established homeowners do not like the rental options available to them.
An apartment may be less expensive than a single family residence, but it is a very different lifestyle. And if you are in an area where rents are $1,500 to $2,000 per month, you could be paying $24,000 per year in rents which can also cut into the money you set aside from your sale after many years of renting. In 10 years, that would be $240,000 paid in rents to someone else.
What is more expensive: costs of a reverse mortgage or selling your home?
When is selling your home a better idea than taking a reverse mortgage?
When would taking a reverse mortgage be smarter than selling home?
Are there advantages as a senior to relocate during retirement?
Are there any tax consequences when selling a house vs taking a reverse mortgage?
- Is a Reverse Mortgage Right for Me?… Let’s Weight the Pros and Cons
- 4 Reasons A Reverse Mortgage May Be a Bad Idea