Selling a Home vs. Choosing a Reverse Mortgage
As a senior homeowner, you may be faced with certain challenges. One of which could be continuing to afford to keep up with your home expenses. In many cases, senior homeowners on fixed incomes find it difficult or even impossible to continue to pay their mortgage payments, utility bills, taxes, insurance and general maintenance costs – in addition to other everyday expenses. For some, it can all be too much. That’s why many older homeowners decide to sell their homes and downsize to something more manageable, or move into a rental home or retirement home.
What are the Benefits of Selling Your Home as a Senior Homeowner?
As we get older, our bodies may not allow us to keep up with the demands of home maintenance. Things like yard work, cleaning gutters, fixing the sink or painting the shutters may be more difficult to do ourselves, and too expensive to hire someone else to do for us. Selling your home can free you from a lot of these arduous tasks if you choose to downsize or move into a lower-maintenance home.
Furthermore, selling your home may provide you with a good deal of money that you could use to help fund your retirement or pay for your lease at an upscale retirement community. Naturally, we can’t say for sure that you’ll make a profit on the sale of your home; it all depends on the value of your home at the time and how the market is in your area.
And last but not least, you may wish to sell your home to your adult children or another family member while you’re still living, to ensure that the home stays in the family once you’re gone. This may not work well for all families, but for some situations it may be ideal. Discuss the options with a financial planner or mortgage professional, as well as your heirs/family members to get their input.
What if I Don’t Want to Sell?
Maybe you have a strong sentimental attachment to your home, or perhaps you simply don’t want to go through the hassle and expense of moving. If any of these circumstances apply to you, then selling your home may not be ideal. Instead, a home equity conversion mortgage (HECM), aka reverse mortgage, may be worth considering.
What is a Reverse Mortgage?
Reverse mortgages are designed to help senior homeowners age 62 and older afford to stay in their homes. With an HECM or reverse mortgage, you do not have to make mortgage payments to the lender.* Instead, the lender pays you.
You can receive funds in a variety of ways including a lump sum, monthly installments, or through a line of credit. You can use the money for whatever you like, but most reverse mortgage borrowers use it to supplement their income, help pay the taxes and insurance on their homes, or cover the cost of needed repairs or renovations.
The reverse mortgage does not need to be paid back until after the homeowner no longer uses the home as his or her primary residence (either by moving or passing away). Once either of those situations occur, the loan must be repaid. If the homeowner has heirs, the heirs may pay off the loan to gain ownership of the home, but the heirs are not held personally liable for repaying the reverse mortgage debt.
In some cases, the borrower’s heirs sell the home and use the money from the sale to pay off the reverse mortgage debt.
If the sale of the home does not generate enough money to repay the reverse mortgage debt, the FHA absorbs the loss and the heirs/estate is not held liable for the debt.
If the heirs wish to keep the home, they must repay the reverse mortgage debt. This may be a difficult and expensive task for some heirs. Because reverse mortgages amortize in reverse (hence their name), their balance actually increases as time goes on, making them an expensive loan to pay off – especially if the homeowner had the reverse mortgage for several years. Because reverse mortgages are often difficult for heirs to pay off, oftentimes the home ends up being sold to satisfy the debt.
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If keeping the home in the family once you’re no longer able to live in it is important to you, then it may be wise to explore other options besides a reverse mortgage.
Here are a few ideas:
- Sell the home to your children and move into a more affordable, low-maintenance home such as an apartment or retirement/assisted living community.
- Sell the home to your children for them to use as an investment property, and stay in the home as a renter.
- Find ways to cut back your expenses, like refinance your current mortgage to a lower interest rate, cut back on unnecessary spending, and install energy efficient features like a programmable thermostat, EnergyStar appliances or low-E windows.
Keep in mind that every homeowner’s situation and budget is different. Talk with an experienced loan consultant to find out if a reverse mortgage makes sense for your needs.
*Borrower is still responsible for paying taxes and insurance. Speak with a qualified reverse mortgage counselor or reverse mortgage lender for details.