Core Logic reports that the average homeowner is sitting on about  $300,000 in equity. A tidy sum for most whose home represents their largest asset. With more older homeowners struggling to pay their monthly obligations the question arises- should seniors use their homes to pay their bills?

 Downsizing: A realistic option?

In such circumstances, many financial pundits suggest that selling the home and downsizing may be the best choice. It may very well be for those who may find themselves struggling to maintain their property or who live in an area with a higher cost of living. 

“If you really want to use your home equity in the best way possible, selling the home and downsizing would be the way to go”, said Jay Garvens, business development manager at Churchill Mortgage in a recent CBS Money Watch column. “Simply sell the house, take the cash, and move to a more affordable community. You would then have enough money left over to pay your bills for the remainder of your retirement years”, says Garens.

But is it really that simple? Not exactly.

Older homeowners with an existing mortgage who want to sell and downsize are likely to find their new mortgage payment is not substantially less than the mortgage payment they have today thanks to the average 30-year mortgage rate being more than double what it was three years ago. This begs the question of what is the best way for an older homeowner to extract equity from their home without increasing their already burdensome debt load?

HELOCs only add to the problem

Some may opt for a Home Equity Line of Credit (HELOC) to get the funds needed to cover their monthly expenses. The problem is HELOCs require monthly payments which will increase after the loan’s initial draw period ends. This leaves the homeowner in a worse position having yet another bill to pay each month undermining their need to increase cash flow to meet their monthly obligations. This is where the desire and accessibility to cash can lead to short-term thinking with long-term financial consequences.

The no-payment, optional payment loan“If there are no other assets to access, a reverse mortgage can be a way to maintain retirement,” David Orsolino, a financial advisor at Strategies for Wealth told CBS Money Watch. “This will allow for tax-free income and allow you to remain in the home.”

Actually, it’s tax-free loan proceeds which are typically not taxed like income. Any additional source of income is subject to federal or state income taxes. Yet, Mr. Orsolino is correct that reverse mortgages can help older homeowners maintain their standard of living in retirement. Wanting to bequest the home to adult children is admirable but should be done knowing that 70% of adult children plan to sell the home they inherit according to a Charles Schwab survey. In such situations, the pragmatism of selling the home overcomes any sentimental misgivings the children may have of keeping their childhood home. 

Older homeowners struggling to pay their monthly bills should consider the following questions:If I don’t tap into my home equity will we be a financial burden to our children?

Does selling and relocating to a new home make financial sense?

Would getting a HELOC to access cash be the best choice when it only adds to my monthly payments?

Do I want to return to work? If so, am I mentally and physically prepared to do so?

Would my children prefer that we live comfortably and be financially independent instead of inheriting the home?

Not everyone has the equity required to qualify for a reverse mortgage. But for those who do the flexibility of the loan and the boost to their monthly cash flow may be just the answer they’ve been looking for. 

By Shannon Hicks