Retirement often brings not only large expanses of free time but also worries about how you can sustain your lifestyle. If you own a home and your cash flow is a trickle, you may be considering a reverse mortgage to give you some financial breathing room. But is a reverse mortgage the right choice? Or should you sell your home free and clear?
There are benefits to both tactics, and the answer to that question is largely dependent on your financial needs. In this article, we’ll explore the pros and cons of each option.
- Reverse mortgages allow you to stay in familiar surroundings as you age.
- Funds from reverse mortgages can be used to pay for home healthcare or home modifications for safety.
- Selling can be a good choice if you want to downsize or move to assisted living.
- Moving from homeownership to renting takes you out of control of your annual living expenses.
How a Reverse Mortgage Works
A reverse mortgage is a loan borrowed against the equity that you have in your home. Instead of paying the bank monthly to build up equity, as in a traditional mortgage, the bank pays you in either a lump sum or installments over time. Some reverse mortgages must have a specific use, such as home improvements or paying off debts, but others can be used for monthly expenses.
There are drawbacks to reverse mortgages, chiefly that you are depleting the equity in your home. Once that equity is gone, the only way to pay back the reverse mortgage is to sell the house and pay the debt using the proceeds. Most of the time, that duty falls to your heirs after you have passed away, but if you move to long-term care for more than 12 months, fail to pay your property taxes, or don’t keep the home in good repair, then the lender may also require you to pay it back.
Advantages of a Reverse Mortgage
One of the main benefits of a reverse mortgage is that it allows you to stay in your home longer. With the prices of long-term care and nursing homes skyrocketing, many people prefer to age in place, utilizing community resources and in-home healthcare if needed.
Keeping your home has several advantages. The cost of living in your own home is significantly less than comparable accommodations in an assisted living facility or nursing home, even if home healthcare is required. According to a recent cost-of-care survey, assisted living averaged $4,500 a month, while a nursing home in a private room averaged more than $9,000 a month.
As well as financial reasons, many older adults prefer to age in place. With modifications such as handrails, stair assists, and accessible showers, many find ways to stay in their homes safely. Using a reverse mortgage for cash flow allows you to make the necessary modifications and stay in comfortable and familiar surroundings.
Funds from a reverse mortgage can also pay for home healthcare when needed. If health needs progress past what home health can sustain, you can still move to long-term care for 12 months before triggering a repayment of your reverse mortgage.
Disadvantages of a Reverse Mortgage
Since a reverse mortgage is a loan, fees include mortgage insurance premiums, origination fees, and service fees. In addition to the fees, a reverse mortgage depletes your equity, potentially leaving nothing for your heirs.
If you have to leave your home for longer than 12 consecutive months, your reverse mortgage will have to be repaid. If you anticipate moving to assisted living for the long term, it may be wiser to sell.
Benefits of Selling Your Home
Of course, if funds are tight, the alternative to a reverse mortgage may be selling your house outright. There are several benefits to selling rather than reverse mortgaging your home.
Selling your home can give you access to liquid cash, with few fees involved. If you plan on moving to assisted living or nursing care, then this can be one of the best ways to pay for it. In addition to having a more significant amount of capital to work with, you also reduce the amount of responsibility—no property taxes, homeowners insurance, or home maintenance is required.
Also, selling the family home can be an excellent opportunity to downsize your life. Many communities offer maintenance-provided homes that take the ongoing work out of homeownership and cater to older Americans. If you decide to sell and move, consider moving costs as well.
If you intend to leave an estate for your heirs, selling can allow you to invest the money from the sale of your home in ways that can benefit them without worrying about selling the house to repay the reverse mortgage loan.
Downside of Selling Your Home
The biggest downfall, of course, is the need for a place to live. While selling in a housing boom will result in a considerable profit, especially if you’ve owned the home for some time, you’ll still have to find accommodations in the same market. According to Realtor.com, rents have increased 19.8% year over year for studio to two-bedroom apartments since January 2021, indicating that finding an affordable rental may be challenging.
Not only is finding new accommodations more expensive, but renting rather than owning puts you at the mercy of an ever-rising housing market. If rents continue to rise, you may find yourself priced out of affordable housing before you’re ready for long-term care.
Can I run out of equity on my reverse mortgage?
Yes, you can. In the case of home equity conversion mortgages (HECMs), the U.S. Department of Health and Urban Development (HUD) requires up-front mortgage insurance premiums to protect lenders in this instance.
Is it cheaper to use home healthcare or assisted living?
This depends on how much help you need. If you need full-time care in your home, it may be more cost-effective to move to assisted living, where healthcare costs are built into the price. If you only need occasional help, it’s much more cost-effective to hire part-time help in the home.
How much money can I borrow on my reverse mortgage?
Reverse mortgages are based on the age of the borrower(s), the loan’s interest rate, and the value of the home. If you own the home outright, you can typically borrow up to half of the appraised value. If you still owe the bank and pay a mortgage, you can typically borrow up to half of the equity that you’ve built up.
The Bottom Line
If you are happy and safe in your home but need more cash for monthly expenses, home repairs or maintenance, or home healthcare, a reverse mortgage may be a great choice. Despite up-front fees and interest, a reverse mortgage allows many people to enjoy the trend of aging in place rather than shelling out thousands per month for assisted living.
In theory, selling is a better choice if you’re looking to downsize. With rising rent prices and home values at an all-time high, finding new accommodations may be more challenging than you anticipate. The correct answer depends entirely on your goals, as well as your level of health and independence.