Should I Get a Reverse Mortgage or Downsize?

The short version

Both options answer the same problem: a lot of your net worth is sitting in the house, doing nothing for your monthly life. Downsizing solves it by selling. A reverse mortgage solves it by borrowing against the home without payments, repaid when you leave. The right one depends far less on the products than on your honest answer to where you want to live, and for how long.

What downsizing actually does

Selling and moving somewhere less expensive converts the equity into cash outright. No loan, no growing balance, no upfront mortgage costs. If the gain on the home is under the exclusion most homeowners qualify for, much or all of it comes out untaxed.

What it costs is easy to underestimate:

• Selling and moving are not free. Agent commissions, closing costs, movers, and whatever the next place needs come off the top before you see a dollar.
• The next home has its own bills. Taxes, insurance, association dues and upkeep continue, sometimes higher than you expect in a newer building or a different state.
• The move itself. Leaving a neighborhood, a church, a doctor, and the house the kids grew up in is a real cost, even when it is the right call.

Downsizing is at its best when you already wanted to move, or when the current house has become more work or more expense than it is worth to you.

What a reverse mortgage actually does

A reverse mortgage is a loan against the equity you already have, available from age 62, with no monthly payments. You can take a lump sum, a line of credit, or monthly payments, and the balance grows over time instead of shrinking. It is repaid when you sell, move out permanently, or pass away, usually from the sale of the home, and federal insurance means you or your estate never owe more than the home is worth.

What it costs is different in kind:

• Upfront costs are meaningfully higher than a conventional loan, and they are front-loaded, which is why we tell people it takes roughly three years in the home for those costs to be worth paying.
• The balance grows. Interest accrues, and what is left for you or your heirs shrinks over time.
• You still own the house, with the responsibilities that come with it: taxes, insurance, and upkeep.

A reverse mortgage is at its best when you are certain you are staying, and the equity would otherwise sit unused for years. The Reverse Mortgages guide walks through the mechanics and the questions to ask before saying yes.

Side by side

• Where you live afterward: downsizing, somewhere new and smaller; reverse mortgage, right where you are.
• How much equity you unlock: downsizing, all of it, minus selling and moving costs; reverse mortgage, a portion, set by your age, the home’s value, and current rates.
• What you owe afterward: downsizing, nothing; reverse mortgage, a balance that grows until the home is sold.
• Upfront cost: downsizing, selling and moving expenses; reverse mortgage, origination, insurance, and closing costs, higher than a standard loan.
• Ongoing cost: downsizing, the new home’s taxes, insurance, and upkeep; reverse mortgage, the current home’s taxes, insurance, and upkeep, plus accruing interest.
• What is left for heirs: downsizing, the cash you did not spend and the new home; reverse mortgage, the home’s value minus the loan balance.
• Minimum sensible horizon: downsizing, none, if you want to move; reverse mortgage, roughly three years in the home.

Who downsizing is right for

• Anyone who is open to moving, or already wanted to.
• People whose house has become more work or more expense than they want.
• Households that want the equity fully unlocked with no loan growing behind it.
• Anyone unsure whether they will stay, because selling keeps every future option open.

Who a reverse mortgage is right for

• People who are certain they will stay in this specific home for years, and whose plan does not change if the equity is used.
• Households with meaningful equity and a need for income or a reserve, without wanting to sell investments in a down market.
• Anyone who has already sequenced the other pieces, Social Security timing, withdrawals across accounts, and wants one more arrow in the quiver rather than the first one.

What people get wrong

• Treating the house as untouchable. For a lot of families, it is the largest asset they own. Leaving it entirely out of the plan is a decision too.
• Counting the gross, not the net. The difference between two sale prices is not what lands in your account.
• Using a reverse mortgage to avoid deciding. If you might move, a reverse mortgage layers a second decision onto an unsettled one, and its upfront costs punish a short stay.
• Deciding in one meeting. Both options depend on where you will live, what else is in the plan, and how they compare to the alternatives. That is a conversation, and there is no cost to having it with us.