During consultations in Montgomery, I often hear similar concerns from those approaching retirement. They are unsure whether it would be better to downsize to a smaller home because their current house is too large and difficult to manage, or to stay in their current home and use a reverse mortgage to generate funds. Recently, one individual I consulted had been contemplating these two options for several weeks.

To start with some numbers, the median home price in Montgomery is projected to be around $200,000 by 2026, reflecting a 0.55% increase from the previous year. This figure suggests that households who have owned their homes for a long time likely have a significant amount of equity built up. If they choose to downsize, they can cash out this equity through the sale and move to a smaller home, using the remaining difference to supplement their living expenses. On the other hand, if they opt for a reverse mortgage, they can stay in the same house while converting part of that equity into cash flow. Both options ultimately serve as ways to convert long-held home equity into retirement living expenses, but the difference lies in whether they cash out all at once or withdraw it gradually.

To elaborate on how a reverse mortgage works, homeowners aged 62 and older can receive funds against their home as a lump sum, monthly payments, or a line of credit, and instead of making monthly repayments, they repay the loan when they sell the home, pass away, or no longer use it as their primary residence. Compared to downsizing, one advantage is that there is no hassle of moving or the burden of leaving a familiar neighborhood.

However, there is one more important number to consider. The effective property tax rate in Montgomery County is around 0.48%, which is relatively low within Alabama, but receiving a reverse mortgage does not eliminate the obligation to pay this tax. A financial assessment must confirm that the homeowner can continue to pay property taxes and homeowners insurance to get the loan approved, and failing to meet this obligation later can lead to default risk. Choosing to downsize may even reduce the property tax burden by moving to a smaller home, so it's essential to evaluate each option based on individual financial situations rather than making a simple comparison.

Cost considerations are also important. Reverse mortgages tend to have higher initial costs than traditional mortgages when including origination fees, mortgage insurance, and closing costs. Additionally, as time goes on, the home equity decreases, which means that the assets passed on to children may also diminish, marking a significant difference from downsizing. Downsizing allows for full cashing out of equity at the time of sale, while a reverse mortgage involves withdrawing equity gradually.

Within Montgomery County, the variation in property tax rates is noteworthy. Pike Road has the highest rate at 0.68%, while Fitzpatrick has the lowest at around 0.40%, with differences based on school districts and special district assessments. If downsizing involves moving to a different neighborhood within the county, it's helpful to consider these variations in tax burdens beforehand. Conversely, if opting for a reverse mortgage and staying in the current home, it's important to remember that the current address's tax rate will continue to apply.

As of 2024, individuals aged 65 and older make up 18.6% of Alabama's population, indicating that households facing these dilemmas are likely to continue increasing. There is no definitive answer to which option is better; it is a choice that must consider income levels, health status, and attachment to the neighborhood. It is essential to undergo mandatory counseling with a HUD-approved agency before applying and to discuss thoroughly with family. This article does not constitute investment or legal advice, and consulting with a professional before making a decision is recommended.