You probably are well aware that the inflation rate in the U.S. has been hitting fresh 40-year records lately. But did you know divorce rates in the U.S. for older couples have been reaching new highs lately, too? In fact, for couples in the U.S. who are 65 and older, the divorce rate has tripled since the 1990s. The trend is called “Silver Divorce” or “Grey Divorce.”
For older adults who are divorcing, assets have likely been intertwined for decades, adding to the challenge of dividing them. Financial needs are sure to be top of mind, as both parties will need a means to support their own individual lifestyles throughout a potentially lengthy retirement period.
For homeowners 62 and older, a reverse mortgage could help as part of a divorce settlement.
What is a reverse mortgage?
While there are various types of reverse mortgages available, the Home Equity Conversion Mortgage (HECM) is by far the most utilized option and the only one insured by the Federal Housing Administration (FHA).
A HECM enables homeowners 62 and older to access a percentage of their home equity as cash, fixed monthly advances, or a line of credit. Unlike other types of home loans, reverse mortgages do not require the borrower(s) to make a monthly mortgage payment toward the loan balance, so long as a borrower lives in the home, maintains it, and pays the property charges, like taxes and insurance.
A HECM loan generally becomes due and payable when the home is no longer the primary residence of at least one borrower (e.g., the last surviving borrower passes away or permanently moves into a nursing home). The loan is usually satisfied via the sale of the home. In instances where the loan balance exceeds the home value when the loan is due and payable and the home is sold, the FHA insurance kicks in to cover the balance deficiency. The borrower and heirs can rest easy knowing they won’t be stuck with a bill after the sale of the home.
Note: A reverse mortgage can also be used to purchase a new home. More on that in a bit.
How could a reverse mortgage help as part of a divorce settlement?
Scenario 1 — Spousal Buyout
Let’s say one spouse wants to continue to live in the home and one wants to move out, and the departing spouse wants his or her share of the home equity. The reverse mortgage could allow one ex-spouse to stay in the home, with the reverse mortgage used to pay a necessary portion of the home’s equity to the other ex-spouse. Again, a reverse mortgage doesn’t require monthly principal and interest payments toward the loan balance, so long as the borrower lives in the home and meets the loan terms. In other words, the buyout can happen for the departing spouse without disrupting either retirement plan.
Scenario 2 – Sell and Both Buy
Alternatively, the home could be sold with the proceeds split, and then each of the ex-spouses could use his or her half of the home equity with a Home Equity Conversion Mortgage (HECM) for Purchase (H4P). An H4P loan allows homebuyers 62 and older to purchase a new primary residence with a down payment of about half of the purchase price* from his or her own funds — the remainder is funded by the H4P loan. The homebuyer can, and typically does, apply proceeds from the sale of their current home toward the down payment requirement.
By selling the home, each spouse can have half of the equity, which is often enough for both to acquire a similar home with no mortgage payment using an H4P loan (must live in the home and pay the property charges, like taxes and insurance). So, it feels a lot like an all-cash payment, except the borrower gets to keep more of his or her retirement assets to use as he or she wishes.
There are many legal and financial planning reasons for your clients to use a reverse mortgage loan in retirement.
From estate planning and tax planning to foreclosure prevention and litigation, reverse mortgages can be an effective tool used in legal and financial planning. Benefits to your clients potentially include increased cash flow, increased portfolio longevity, decreased income taxes, and an increase in net worth and legacy for heirs**. To learn more, contact a retirement mortgage specialist at Fairway Independent Mortgage Corporation.
About Author: Harlan Accola
Harlan Accola is the National Reverse Mortgage Director at Fairway Independent Mortgage Corporation. He has been in the mortgage industry for over 20 years and has worked with all types of loans, but his specialty has always been working with the 62+ age group and reverse mortgages. Harlan is the author of Home Equity and Reverse Mortgages: The Cinderella of the Baby Boomer Retirement. Accola may be reached at HarlanA@fairwaymc.com.
*The required down payment on your new home is determined on a number of factors, including your age (or eligible non-borrowing spouse’s age, if applicable); current interest rates; and the lesser of the home’s appraised value or purchase price.
**This advertisement does not constitute tax and/or financial advice from Fairway.
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