Reverse mortgages (now more accurately referred to as Home Equity Conversion Mortgages or HECMs) got a bad reputation many years ago. But they have evolved considerably and are now worthy of consideration.
In many divorces, home equity is a large or even the largest asset. A reverse mortgage can increase the options available to you when it comes to both making use of the equity in your home and providing future cash flow. Therefore, in a divorce it might be helpful in achieving an optimal resolution of spousal support and/or division of your assets and debts.
There are also Home Purchase Reverse Mortgages that can help a divorcing spouse buy a new home.
Qualifying for a Reverse Mortgage
The borrower must be:
– 62 or older;
– on the title to the house;
– occupy the residence;
– meet income and credit qualifications.
A reverse mortgage allows homeowners to borrow on the equity in their home as they might via a traditional mortgage or HELOC. There’s a formula that calculates the maximum amount that can be borrowed. Most home equity loans are for 45-55% of the property value. Up to 60% of this can be received the first year. The remainder can be received any time thereafter.
The loan proceeds can be received as a:
- lump sum;
- line of credit (like a HELOC);
- equal monthly payments for as long as at least one borrower remains in the house;
- equal monthly payments for a fixed period selected by the borrower; or
- combination of the above.
No monthly payment is due to the lender. There’s no pre-set termination date for a reverse mortgage. It’s not due until the last remaining borrower has permanently left the residence. Prepayments can be made at any time without penalty.
Divorce Options / Solutions
Here are some possible ways a reverse mortgage might be worth considering in a divorce. It could be used to:
- pay off an existing mortgage (with no monthly payments thereafter as would be required with a traditional refinance);
- provide supplemental monthly income;
- defer the need to collect Social Security income until a later age when the monthly Social Security payments would be larger;
- when one spouse is going to stay in the marital home and other would like to buy a new home, a reverse mortgage on the marital home could provide the funds for a down payment on the new home and a Home Purchase Reverse Mortgage might be used to pay the rest;
- when the marital home is going to be sold, the sale proceeds divided and each spouse would like to buy a new home, each spouse’s sale proceeds on the marital home could be used for their down payments and each could get a Home Purchase Reverse Mortgage to pay the rest.
There is a lot to understand about the details of reverse mortgages and the options associated with them. If you are at all interested, your mediator should be able to help arrange a consultation with a reverse mortgage specialist.