A client asked which option is better: downsizing to a smaller home or staying in their current home and using a reverse mortgage. This question often arises during retirement when expenses for living and healthcare tend to increase. Comparing the two options side by side can help clarify the decision, as one may have advantages while the other may present challenges.

First, let's clarify what a reverse mortgage is. It is a loan product for homeowners aged 62 and older that allows them to borrow against the equity in their home. Unlike a traditional mortgage, where payments are made monthly, a reverse mortgage provides funds through a lump sum, monthly payments, or a line of credit. The loan is repaid when the home is sold, the owner passes away, or the home is no longer used as the primary residence. The most common product, HECM (Home Equity Conversion Mortgage), is insured by the Federal Housing Administration (FHA) and is the only type of reverse mortgage backed by the federal government.

Downsizing involves selling a home to obtain a lump sum of cash and moving to a smaller home or facility. According to Zillow, the average home value in New Orleans was $245,144 as of July 31, 2026, which can help estimate the amount of cash remaining after a sale. In contrast, a reverse mortgage allows homeowners to stay in their familiar neighborhood and among familiar neighbors without moving, which is a significant difference from downsizing. However, property taxes and insurance premiums must still be paid in this case. The effective property tax rate in Orleans Parish, where New Orleans is located, is approximately 0.6 to 0.82 percent, which is somewhat higher than the Louisiana state average of 0.55 percent.

When weighing the pros and cons of the two options, downsizing provides a lump sum of cash upfront and reduces ongoing management burdens, but it requires leaving a familiar home. A reverse mortgage allows homeowners to remain in their current residence, secure cash flow without monthly repayment obligations, and has a non-recourse structure, meaning that if the home value falls below the loan balance, heirs are not required to pay the difference due to FHA insurance. However, over time, the equity in the home decreases, reducing the assets that can be passed on to children, and initial costs such as origination fees and mortgage insurance premiums (MIP) are generally higher than those of traditional mortgages.

It's important to consider the eligibility requirements. Applicants must be at least 62 years old, the home must be their primary residence, and if there is an existing mortgage balance, it must be at a level that can be paid off with the reverse mortgage funds. A financial assessment must also be passed to ensure the ability to continue paying property taxes and insurance, as failing this could lead to a risk of default.

As of 2024, Louisiana has a population aged 65 and older that makes up 17.8 percent of the total. Health status and potential future needs for long-term care services are also variables to consider. If a homeowner is away from their home for an extended period and stays in a care facility, the home may no longer be recognized as their primary residence, triggering loan repayment. It may also be beneficial to consider a combination of both options. For instance, one might secure necessary funds through a reverse mortgage while remaining in their home, and then consider downsizing later if health or living conditions change. However, it is important to factor in that selling the home after obtaining a reverse mortgage will reduce the remaining equity due to accumulated interest and fees. Whether downsizing or opting for a reverse mortgage, the right choice varies based on individual circumstances. If considering HECM, it is essential to undergo mandatory counseling with a HUD-approved agency before applying, and due to the existence of scams targeting seniors, it is advisable to discuss decisions thoroughly with family members before proceeding. This is not investment or legal advice, and consulting with professionals before any actual contracts is recommended.