When talking to a retiree in Dimarest, they often find themselves weighing two choices: downsizing by selling their current home and moving to a smaller place, or staying in their home and converting their equity into cash through a reverse mortgage. When comparing the two methods, the benefits and sacrifices differ.

Let's first look at reverse mortgages. This is a product for homeowners aged 62 and older that allows them to receive funds using their home equity as collateral. Instead of making monthly payments, they receive money from the lender in a lump sum, monthly payments, or a line of credit. Repayment occurs when the home is sold, the owner passes away, or no longer lives in the home. The Home Equity Conversion Mortgage (HECM) is a typical example, insured by the Federal Housing Administration (FHA). The source is hud.gov.

The home values in Dimarest are relatively high even within New Jersey. According to Zillow, the average home value is $1,566,155, which has increased by 17.2% over the past year. The median sale price is reported to be around $1,670,000. If one chooses downsizing, they can sell their equity for a lump sum, while opting for a reverse mortgage allows them to stay in their home and convert part of that equity into cash flow.

Before deciding between these two options, there is a procedure to be aware of. For HECM, one must undergo mandatory counseling with a HUD-approved counseling agency before applying. This counseling covers eligibility requirements, cost structures, and financial assessments. There is no way to skip this step.

To put it simply, the advantage is that it creates cash flow for living expenses or medical costs without the burden of monthly repayments. It is a non-recourse structure, meaning that if the home value falls below the loan balance in the future, heirs are not required to pay the difference.

However, it is also important to consider the costs and risks compared to downsizing. When adding origination fees, mortgage insurance premiums (initially around 2%, then 0.5% annually), and closing costs, the initial expenses are higher than a traditional mortgage. Over time, the equity decreases, and the inheritance assets diminish. Property taxes and insurance premiums must still be paid by the homeowner. The average effective property tax rate in Bergen County is about 1.69% (PropertyTaxRates.org). If these payments cannot be maintained, there is a risk of default. Downsizing, on the other hand, provides a lump sum but requires leaving a familiar neighborhood and home.

Let's also touch on eligibility requirements. One must be at least 62 years old, and the home must be their primary residence. If there is an existing mortgage, it must be paid off with the loan proceeds first. They must also pass a financial assessment to ensure they can continue to pay property taxes and insurance. Downsizing does not have such eligibility requirements.

The amount one can receive varies based on age, interest rates, and home values. Generally, the older one is and the lower the interest rates, the larger the amount. The sale proceeds from downsizing can fluctuate based on market conditions, but the amount received from a reverse mortgage is easier to predict since it follows a set calculation.

A third option to consider is a Home Equity Line of Credit (HELOC). With a HELOC, monthly principal and interest payments are required, and the income assessment is more stringent. While downsizing means completely leaving the home, a HELOC allows one to stay while still bearing the burden of monthly repayments. A reverse mortgage falls somewhere in between.

Another option to consider is the line of credit feature of HECM. The unused portion of the line of credit increases over time. Downsizing does not have this feature. Additionally, if a non-borrowing spouse lives with the borrower, they are protected to continue residing in the home after the borrower's death, provided they meet the requirements.

As of 2024, 18% of New Jersey's population is aged 65 and older (USAFacts). There is no right answer for either choice. If you are contemplating this issue in Dimarest, it is advisable to have thorough discussions with a HUD counseling agency and your family before making a decision.