I recently consulted with a client who has lived in Torrance for over 30 years. Their children have all moved out, and they feel that their current home is too large. They are contemplating whether to move to a smaller home or stay in their current home and utilize a reverse mortgage.

Both options have their advantages and drawbacks. Moving to a smaller home would reduce maintenance burdens and allow them to cash out some equity for extra funds, but they would have to leave their familiar neighborhood and incur fees and taxes during the selling and buying process. On the other hand, staying in their current home while using a reverse mortgage would allow them to maintain their familiar lifestyle, but the available funds would be limited to the loan amount.

A reverse mortgage is a product that allows homeowners aged 62 and older to 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 Home Equity Conversion Mortgage (HECM) is a typical product backed by the Federal Housing Administration.

Looking at the current market, the housing values in Torrance are at a level worth considering for this calculation. According to Zillow, the average home value in Torrance is $1,116,811, which is a 1.7 percent decrease from the previous year. Homeowners who have lived there for over 30 years likely have a much larger equity stake than when they purchased the home.

In terms of costs, reverse mortgages come with origination fees, mortgage insurance premiums, and initial costs of about 2 percent plus an annual rate of 0.5 percent, making the initial burden greater than a traditional mortgage. Over time, the equity left in the home decreases, which means that the assets passed on to children may also decrease. Property taxes and insurance premiums must continue to be paid by the owner, and while the average effective property tax rate in California is around 0.71 percent, failing to pay these can lead to foreclosure risks. This is a risk unique to reverse mortgages that downsizing does not carry.

Regarding eligibility requirements, the homeowner 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 repayable with the reverse mortgage funds. They must also pass a financial assessment to ensure they can continue to pay property taxes and insurance. If children have moved out and the home is only used by one person or a couple, passing this assessment is generally not too difficult, but it is not a step that can be skipped.

In actual market observations and cases, many people considering reverse mortgages in Torrance do not have children who want to inherit the home or have already planned sufficient inheritance through other assets. In such cases, the burden of decreasing equity may feel relatively less significant. Conversely, if passing the home to children is an important goal, downsizing to transfer equity to other assets may be more appropriate. For those who have lived in the same neighborhood for over 30 years, the property tax basis at the time of purchase often continues to this day, which is another point worth considering when comparing the two options.

On the other hand, due to the non-recourse structure, it is advantageous that heirs are not required to pay any excess if the home value falls below the loan balance later. Downsizing does not offer this guarantee, but if the market is favorable at the time of sale, they can fully cash out their equity. Ultimately, which option is better depends on individual circumstances.

In California, the percentage of the population aged 65 and older is projected to reach 16.5 percent by 2024, and this trend is expected to continue. If considering a reverse mortgage, one must undergo mandatory counseling with a HUD-approved agency before applying, and if considering downsizing, it is essential to review current market values and selling costs. It is advisable to discuss thoroughly with family before making a decision. This article is not investment or legal advice, and consulting with a professional before any actual contracts is recommended.