Downsizing vs. HECM: Which Is Right For You?
Senior homeowners face many decisions as they near retirement and begin planning for the future. While a secure income stream may be awaiting some, the reality for many will be crucial conversations about meeting financial goals and maintaining a lifestyle they can enjoy.
These discussions will likely begin with a fundamental question: Where will you live when you retire? For those whose home is among their biggest assets, it may come down to a choice between downsizing to a smaller, more affordable home or keeping your existing home and obtaining a Home Equity Conversion Mortgage (HECM). The best option will depend on the specifics of the situation, but there are some critical factors to keep in mind to help guide the decision.
As with most real estate decisions, location will play an important role. Downsizing a home allows the owner to cash in on all of the equity in a home, and use it toward the purchase of smaller, less expensive one. The remaining funds can be used to support retirement.
However, if downsizing to the desired location requires putting most or all of the equity toward the new home, there may be little financial upside. In these cases, using a HECM for Purchase may provide a combination of financial security and the perfect location.
Qualifying for a HECM requires applicants be at least 62 years old. Age also determines how much equity a homeowner can tap into. Downsizing, and paying cash for a smaller home, does not have any age requirements. This could give younger retirees access to more of their home equity, sooner.
A major advantage to a HECM is that the Line of Credit or monthly advances from it can be guaranteed for as long the homeowners live in the home, as long as the HECM is in good standing, even if the mortgage surpasses the value of the house. And if a borrower becomes ill, they could be out of the home for up to a year; however, if health issues permanently force the residents from the home, the loan will come due. Downsizing can’t provide the same guaranteed access to funds, but may offer more flexibility if the owners can no longer reside in the home.
The importance of passing assets on to a future generation is another serious consideration. A HECM will reduce the proceeds from the sale of the home that can be left to others because the loan will need to be repaid first, but other assets would be protected even if the amount due exceeds the home’s value. A decision to downsize would not create any new debt, and the home could be passed on at full value.
Planning for retirement is not a simple task, but having accurate information from a trusted source can make it easier. The loan specialists at Open Mortgage are standing by to discuss your mortgage options today.
Things to know about Reverse Mortgages:
- At the conclusion of a reverse mortgage, the borrower must repay the loan and may have to sell the home or repay the loan from other proceeds
- Charges will be assessed with the loan, including an origination fee, closing costs, mortgage insurance premiums and servicing fees
- The loan balance grows over time and interest is charged on the outstanding balance
- The borrower remains responsible for property taxes, hazard insurance and home maintenance, and failure to pay these amounts may result in the loss of the home
- Interest on a reverse mortgage is not tax-deductible until the borrower makes partial or full re-payment