A couple who has lived in Santa Monica for a long time has requested a consultation. They were contemplating whether to sell their current home and move to a smaller one or to stay in their current home and utilize a reverse mortgage. Both options have their advantages and burdens.

Downsizing has the benefit of converting equity into cash that can be used for living expenses or moving to another area. However, there is the burden of relocating from a familiar neighborhood, neighbors, and healthcare facilities. On the other hand, a reverse mortgage allows homeowners to stay in their current home while converting equity into cash. Homeowners aged 62 and older can borrow against the equity of their home, receiving funds in a lump sum, monthly payments, or a line of credit instead of making monthly repayments. The loan principal and interest are repaid when the home is sold, the owner passes away, or the home is no longer used as the primary residence. The HECM, insured by the Federal Housing Administration, is a representative product.

Santa Monica is a particularly meaningful area for this comparison. According to Zillow, as of June 30, 2026, the average home value in Santa Monica is $1,697,753, which is a 1.3 percent decrease from the previous year. If downsizing is chosen, most of this equity can be secured, but the funds available through a reverse mortgage are limited to the loan amount. This is an advantage for downsizing.

Conversely, from a cost perspective, downsizing incurs immediate costs such as sales commissions and moving expenses, while a reverse mortgage involves origination fees, mortgage insurance premiums, and initial costs of about 2 percent plus an annual rate of 0.5 percent, but allows homeowners to remain in their current home. However, over time, the equity remaining in the home decreases, which may reduce the assets passed on to children, a burden that comes with a reverse mortgage. Property taxes and insurance premiums must also continue to be paid, and the average effective property tax rate in California is about 0.71 percent, but failing to pay these can lead to the risk of default.

Looking at the eligibility requirements, one must be at least 62 years old, the home must be the primary residence, and if there is an existing mortgage balance, it must be at a level that can be repaid with the reverse mortgage loan. A financial assessment must also be passed to ensure the ability to continue paying property taxes and insurance premiums. This is a procedure not required for downsizing, but conversely, it can be seen as a process to assess whether one can continue to live in the home securely.

Tax implications are also worth comparing. Selling a home through downsizing may require consideration of capital gains tax on the sale profit, and the property tax on the newly purchased home will be reassessed based on the purchase price. In contrast, with a reverse mortgage, since ownership is retained, the existing property tax assessment method continues. This can be advantageous for long-term owners who have maintained low property taxes, but conversely, it means missing out on potential market gains at the time of sale.

Thanks to the non-recourse structure, heirs are not required to pay any excess if the home value falls below the loan balance, which is a safety feature of reverse mortgages. Conversely, downsizing does not have this guarantee, but there is a risk of not receiving the desired price depending on market conditions at the time of sale. Which option is better depends on each household's situation.

In California, the percentage of the population aged 65 and older is projected to be 16.5 percent by 2024, and this is expected to continue to rise. Both options require careful consideration, so if considering a reverse mortgage, it is advisable to undergo mandatory counseling with a HUD-approved agency before applying, and if considering downsizing, it is recommended to check market prices with a real estate professional. It is also advised to discuss thoroughly with family before making a decision. This article is not investment or legal advice, and it is recommended to consult with a professional before entering into any contracts.