For seniors who are house-rich but cash-poor, finding a way to make ends meet can be difficult. There's not much more frustrating than having significant equity – but no foreseeable way to tap into it.
Thankfully, seniors in this situation have a couple viable options to free up some of that value. Typically, they should look to either downsize their home or enter into a reverse mortgage. A reverse mortgage is a type of home loan for older homeowners (62 years or older) that allows them to convert part of the equity in their homes into cash.
But which option is better? Does it depend on the individual situation of the senior in question? Read on to find out which route is best for you or your loved ones.
If You Want to Stay In Your Home
One of the biggest reasons that seniors take a reverse mortgage, besides the steady income, is the desire to stay in their homes while they live out their golden years.
"The home is where a senior's heart is. Many seniors raised their kids in their home, retired in their home and want to live out the rest of their lives in their home," said reverse mortgage expert Jason Eichmiller.
Unfortunately, a reverse mortgage requires that you have enough equity in your home – which wasn't the case for Jim, one of Eichmiller's recent clients. You need to have significant equity in the home and be 62 or older to qualify for a reverse mortgage.
Jim was a recent widower and struggling to stay afloat on one income. While he would have preferred to stay in his home, he didn't qualify for a reverse mortgage at his current house.
But Jim was able to buy a new, smaller home using a reverse mortgage. He put part of the equity in his old home toward his credit card debt and the remainder toward his new home, which he now has 50 percent equity in. Because he has a reverse mortgage, he doesn't have to make any mortgage payments and still has a house where his grandkids can come play.
This scenario is one example of how you can do both – downsize your home and use a reverse mortgage to maximize your equity. CFP Tom Diem says this strategy is a triple-win for homeowners who are willing to downsize.
Homeowners who've already paid off their mortgage (or can do so after selling their home) can get a reverse mortgage on their new, smaller property to bring in regular income. Retirees worried that their current nest egg may not be enough should consider this method.
Reverse mortgages have gotten an unfair reputation over the years as predatory to seniors who have a sentimental attachment to where they live. But they can be a realistic and viable option for those who aren't ready to leave.
Downsizing is also a good solution for people who are ready to live in a smaller home and want to keep the equity to themselves. But for seniors who need an influx of cash, combining downsizing with a reverse mortgage can give them the best of both worlds – a home of their own with more breathing room in their budget.
"It's up to the professionals who work with a senior to help them see all of their available options and guide them to a situation that might not be perfect, but will allow them to live in emotional and financial comfort," Eichmiller said.
If you're still confused on which route to take, talk to a financial advisor. They'll be able to explain your options, and recommend the best course of action for you or your loved one's individual situation.